Daily Quommentary: Rates Cuts, So What?
Feb 01, 2001 - 09:38:00 HKT
QuamResearch
The U.S. Federal Reserve early this morning cut interest rates by 50 basis points for the second time in less than a month. So what? That's expected and should surprise nobody.
Since the beginning of 2001, the Fed has cut the federal funds rate by a whole percentage point, being the most aggressive rate cuts in recent years. The Fed's signal is clear enough -- the U.S. economy is sinking like a Titanic, and the Fed needs to use the emergency exit to stop it from going into a serious recession. In a statement released this morning, the Fed stressed that its main concern remained an excessive weakness in the economy, suggesting further rate cuts in the coming months. The Fed's statement was released shortly after the announcement of a lackluster 1.4% GDP growth in the fourth quarter of 2000, the weakest growth in more than five years.
U.S. investors responded negatively after the rate reduction. The Nasdaq Composite Index dropped 66 points, or 2.3%, to 2,773. The DJIA erased earlier gains and ended flat at 10,887, slightly up 6 points from Tuesday's close.
HSI expected to give up some of yesterday's gains
Expecting a 50-basis-point rate cut last night, the HSI yesterday closed up 209 points at 16,102 on turnover of $8.27 billion. Yesterday's 1.3% increase in the Index may prove to be immature, and we wonder whether the market needs to give up some of yesterday's gains today.
Properties and banks led the rebound. Cheung Kong (1), SHKP (16) and Henderson Land (12) respectively rose $3, $2.75 and $1 to $103.50, $81 and $41.40. New World Development (17), which is heavily indebted with $38.33-billion loans against shareholders' equity of $58 billion (gearing of 65.8%!), rose 15 cents to $12.30. NWD will be able to save as much as $190 million for every 0.50% reduction in interest rates. Alan Greenspan, the Santa Claus of NWD, has so far helped NWD save about $380 million in annual finance costs, which helps boost profit by 20% according to Multex's consensus earnings forecast for the fiscal year ending 30 June, 2001.
Three of the four index banks gained, but all less than one percent, with Dao Heng (223) unchanged at $42.70. HSBC (5), which dropped back 50 cents on Tuesday, regained $1 to $121.50. Hang Seng Bank (11) and BEA (23) respectively rose 50 cents and 10 cents at $102.50 and $21.35.
Tech shares also rebounded with Hutchison (13) gaining $2.50 at $102.50 and China Mobile (941) up 60 cents at $49.80. Mainland PC manufacturer and distributor Legend (992) rose another 40 cents at $7.15. Its share price dropped from a historical high of $17.50 on 6 March, 2000 to a 52-week low of $4.25 on 21 December last year. The accumulative rebound since then has been almost 70%, and we fear that yesterday might be the height of the recent round of rebound. At yesterday's closing price, Legend was capitalised at over $52 billion, but its earnings for the current year ending 31 March, 2001 should not exceed $1 billion. Even on this optimistic earnings forecast, Legend is still grossly overpriced at a prospective PE of 52 times.
PCCW (8) was slightly up 5 cents at $4.525 despite Richard Li's dad turning down our previous proposal that Hutchison, Li senior's telecom conglomerate, should consider bailing out PCCW. KS Li, who is never a straightforward businessman, however, declined to comment whether he will invest in PCCW with his own pocket money, saying that he has the right not to tell anybody about his personal affairs. Are there any implications with his comments? You guess.
Salute to Tony Measor
We are sad with Tony Measor's, Quamnet's co-founder, chief editor and the original author of Daily Quommentary, "early" retirement yesterday after almost 50 years of a wonderful working life. His excellent insights into the market, his good sense of humour, his uncompromising critiques on companies mistreating minority shareholders' rights, and his Measor-styled replies to viewers' questions, among others will all be remembered.
Dear all, this is Vincent Lam, taking over Tony's job from today onward to write the Daily Quommentary and to reply your questions in the QuamSwer column in both Chinese and English in addition to my regular Small-cap and Large-cap portfolios. I'd also like to introduce all the members of the QuamResearch team. Jay Templeton, a native local English speaker who is fluent in several languages (including some languages that some nasty listed companies don't like to hear), is responsible for the Evening Wrap as well as following companies in the TMT sector. Harry Lo, who has been a senior analyst in several reputable research houses and the co-founder of HKGrowth.com, will be responsible for the property sector and the GEM markets. Allan Ho is responsible for the utilities and the retail sector. Andy Wong covers the red chips and H shares. Last but not least, Victor Tsang is responsible for a number of selected small-caps.
By the way, we are proud to say that we have been quite good on recommending small-caps, including some very early recommendations of Tungtex (518), Boto (585), Kingmaker (1170), Oriental Watch (398) and Texwinca (321) among many others, long before other market commentators discovered them. I can assure you that Tony's school of investment philosophy will be strictly followed inside the QuamResearch team. We hope you will continue to read our articles and send us feedback via emails or the QuamSwer column. (end)
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