Events related to the Crash -- May 1999

• The Bank of Japan has rendered both the overnight call rate, and the 1-year (Japan) Treasury rate, 0.03% -- making the money market yield curve a flat line. This is said to remove most incentives for risk management in Japanese banks. It also ignores the Y2K bug threat.
• Malaysia's international bond was launched smoothly, at 330 basis points over U.S. Treasuries. This is 30 basis points above what was estimated on May 21, 1999.
• Consorcio Ecuatoriano de Telecomunicaciones S.A. CONECEL is defaulting on bonds and credit as follows: [This is an Ecuadorian corporation. My extremely limited knowledge of Spanish suggests this is the "Ecuador Telecommunications Consortium". As such, my impression is that this is reporting a national corporation in bond default....]
• On May 2, 1999, CONECEL failed to pay accrued interest of $8,750,000 due on its 14% Notes due 2002 and 14% Series B Notes due 2002
• CONECEL has retained the investment banking firm of Houlihan Lokey Howard & Zukin Capital for advice regarding a possible restructuring of the above
• Also, CONECEL has not timely paid principal and interest due to Nortel CALA Inc. ("Nortel") under the Credit Facility Agreement dated December 31, 1997.
• CONECEL is currently engaged in discussions with Nortel regarding the restructuring of this indebtedness
• The ownership structure of CONECEL has changed through the issuance of capital stock. New shares of stock were issued in satisfaction of certain indebtedness owed by CONECEL. As a result of such transactions, Centro Empresarial, Cempresa C.A. ("Cempresa"), an Ecuadorian corporation, increased its ownership interest in CONECEL and has become the controlling shareholder of CONECEL. Cempresa is indirectly owned by members of the Parra family.

• A serious degeneration occured in the NATO vs. Serbia situation: Yugoslav President Slobodan Milosevic, Serbian President Milan Milutinovic, deputy Yugoslav Prime Minister Nikola Sainovic, Yugoslav military Chief of Staff Dragoljub Ojdanic, and Serbian Internal Affairs Minister Vlajko Stojiljkovic have been indicted for war crimes against their own homeland: 340 counts of murder, and 740,000 forced deportations. NATO will not tolerate amnesty for Milosevic. (Translation: negotiations are in critical care, if not dead).

• The Euro has hit $1.04/1 Euro. This is close to a chartist resistance level of $1.0345/1 Euro, which is said to be the Euro's last-ditch support before parity with the U.S. dollar. Note that the Euro has been weakening vs. the U.S. dollar since NATO started airstrikes against Serbia/Yugoslavia.
• ALERT: The Dow's 9th largest loss (by magnitude) ever was triggered by Internet stocks. Internet stocks have now plunged low enough that they are triggering margin calls. This causes more sales of Internet stocks, forcing Internet stock prices lower. This is exactly what happened in 1929. We are now witnessing the start of a positive feedback loop with a worst-case scenario of Black Tuesday, if not more extreme.
• The Tokyo and Hong Kong markets have also taken serious losses as of midday.
• Recall that after Black Monday, circuit breakers were put into NYSE trading. I believe the current standards are based on a percentage of some sort of running average. There are two stages: the first causes a 30(?) minute pause, the second shuts down trading for the rest of the day. In a Black Tuesday scenario, these circuit breakers could backfire tremendously: for the rest of the day after the second breaker trips, all stocks are worth nothing. The psychological impact of this on the human participants has not been thoroughly considered by a media-related or expert source. If the reader disagrees with this, please email me documentation, now.

• Malaysia's first international bond offering in nine years is still planned for next week. However, swap spreads this week have severely increased, changing the anticipated spread from 225 basis points over U.S. Treasuries to at least 295 basis points over U.S. Treasuries (this is called face-saving, 300 basis points is even more anticipated). Two teams of Malaysian officials have been putting on a traveling sales pitch for the bonds.
• South Korea has the same rating as Malaysia (Baa3/BBB-), so the "Marathir premium" can be directly measured as the spread between South Korea's international bonds and Malaysia's international bonds.

• The latest IMF attempt to lend money to Russia has not been approved yet. IMF approval is contingent on either a serious effort to control Russia's budget deficit, or drastically improved tax collection.
• Even if the program is approved, the money will not go to Russia, but instead will go to an IMF account and be directly used to service Russia's debts.

• General Carlos Mendoza [Ecuador's armed forces chief] openly said that the army had rejected calls for a coup d'etat in March (specifically, when Ecuador's president Jamil Mahuad froze the banks for a week).

• S&P sovereign credit analyst David Beers (in Hong Kong) said that "most reasonable people" would conclude that the U.S.A. is experiencing an asset bubble. This is particularly evident in Internet stocks. [c.f. Warren Buffett, cited April 14, 1999]. Beers noted that there could be a severe financial eruption in 2-5 years that would require government intervention; however, he did not expect this to affect the U.S.A.'s credit quality. Most of the damage would be in the corporate sector.

• Japan's trade surplus for fiscal year 1998 [April 1, 1998-March 31, 1999] was reported to have grown 17.6%. In calendar year 1998, Japan's trade surplus was reported to have grown 38.7%. March 1999 was reported to have a 25.5% decline to ¥1.073 trillion ($8.76 billion) compared to March 1998, which was substantially lower than the consensus estimate (from Tokyo-based analysts) of ¥1.560 trillion. [That is, the consensus estimate was that March 1999 would have grown 8.3% compared to March 1998. This is a very large qualitative error: the direction is wrong, and the percentage magnitude is too small by a factor of 3.]
• APEC [Asia] is meeting in Malaysia. Japan has offered to guarantee billions of dollars in Asian sovereign debt. However, this is not expected to require Japan to commit any more money than it already has, according to a Ministry of Finance official. Also, while the MoF is planning to use a 1/3 ratio, this number is openly said to be out of thin air. A senior APEC official described this as "helpful" but not "new".
• Japan has a general concern that the Crash (my term) was started by excessive reliance on short-term capital. Japan has a point: Thailand, Indonesia, and South Korea had currency meltdowns when their international debt due in 6 months hit 56% of their total debt, while the Phillipines wavered (but did not succumb) when its international debt due in 6 months hit 55%. [These are memorized figures; I will appreciate well-documented correction (the originals are from AP or Reuters, somewhen in late 1997).]

• Romania's economy has gone into "a deep recessionary spiral" [macroeconomic depression]. Romania, furthermore, has a history of '"incoherent policy making, inadequate corporate laws, complicated investment methodologies, corruption, and heavy bureaucracy."' As such, the domestic currency rating is Caa1 [thoroughly junk, but not yet a 100% loss].

• Malaysia has implicitly supported a plan to buy up Malaysian shares that have been frozen on Singapore's Central Limit Order Book (the Singapore stock market) for the past seven months. Effective Capital Sdn Bhd (controlled by the little-known Akbar Khan) has received ["out of the blue"] approval from Malaysia's Foreign Investment Committee, and a waiver from Malaysia's Securities Commission freeing it from takeover obligations if its holdings in the affected stocks exceed one-third of the total shares. This plan has virtually no overseas credibility.
• But does it need "overseas credibility"?? The object seems to be to improve the integrity of the Malaysian Firewall, which so far has been holding out without any "overseas credibility" anyway. While I'm certain that most nations do not have the circumstances required to replicate the Malaysian Firewall, it is a strategy that should be studied carefully, not ridiculed for econo-ideological reasons.
• Goldman Sachs and Jardine Fleming have both denied making offers to help Malaysia buy up these shares.
• Effective Capital's offer would pay a significant premium over the price the shares were frozen at, but a signficant discount over their trading value in the Malaysian stock market [if it were not for the Malaysian Firewall's intended effect of rendering the Malaysian ringgit valueless outside of Malaysia....] I am appalled by the collective avarice of the holders of the frozen assets: collectively, rather than take a significant physical profit, they want to get their theoretical 100% in a currency that is worth practically nothing where they are [i.e., a near-total loss!]

• The satellite Solidaridad One (c.f. April 28, 1999 [CNNfn] for why this satellite is important) has developed a second, different fault that disabled just pagers. This is the second fault in four days.