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Showing posts from February, 2009

Yen/Dollar Rate Above 98, Good For Stocks?

Readers would be familiar with my yen-rate theory. I expected the weaker yen to signal less risk aversion, and hence a potential to move funds back into equities. The flight-to-safety play in 2008 didn't include gold. In fact, it was mostly concentrated in U.S. treasuries, the U.S. dollar and the Japanese yen.

The Japanese yen is down more than 10% since it peaked mid-December of last year. The yen has actually fallen below the levels seen at the height of credit anxiety during the October and November low points. However equities have not jumped as I expected. The yen typically rose with risk aversion as it did at the start of the collapse in mid-September of last year.The yen-dollar rate has scaled above 98 yen as write this.
Japan is more dependent on its exports for economic success than nearly any other nation. The global recession and the strengthening of Japan's currency has made it terribly difficult for its multinationals to sell products to the world. It does not see…

The Formula That Brought On This Crisis

I blame the ratings agencies for the bulk of the credit mess we are in, the Wall Street firms are not far behind. Ironically, both parties relied on a simple formula devised by a math wizard. He is David Li, and you can find him now as the Head of Risk management at the China sovereign wealth fund, CIC. Below was the exceptionally revealing article from the magazine Wired (of all places).

A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He …

European Union Financial System Might Be Even Worse Off

The media tend to focus on the credit crisis too much on just the US and maybe the UK. Even the secondary focus was largely on how China would figure in being a catalyst for recovery. There are pockets of the world that are facing the crisis with more devastation, and urgency for help. In a sense for them, its should be called a debt crisis rather than a credit crisis. We are talking of Eastern Europe, Western Europe, Russia and Ukraine... hey, basically the EU. Most of what's written below was taken from The Telegraph, UK.
In much of Western Europe, things are nearing boiling point. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European B…

Ideologies, Financial Markets & Personal Values

Which camp do you belong to? Republicans or Democrats, Socialist or Capitalist... many in the Western world often know what they are or what they stand for ... e.g. "he is a left leaning republican ... blah-blah..." People in Asia do not usually ponder these matters, the most important political consideration is whether you are a Communist, and as long as you are against Communism, you are ok. Now here is a case which caught fire over the weekend. If you are honest and admit whose side you are on - it basically tells a lot about how you view the world and people around you.

On CNBC, Rick Santelli complained and ranted that the president’s housing plan rewarded “bad behavior” and suggested creating an Internet Web site to allow Americans to vote on whether they wanted to subsidize “losers’ mortgages.” The rant captured many's attention, some for and some against. Over the weekend, the notable and fiery Robert Gibbs, Obama's press secretary, launched a strong rebuttal …

Credit Crisis 101 - Leverage

Pick up any business magazine or paper, or watch the business channels, you will find a plethora of information on the credit crisis. Sometimes, too much information overload will distract from the real issues and when we talk about the crisis, we have too many angles on the problem. Unless we zero in on the root cause (not not ascribing blame), we won't be able to get a handle on the crisis and its effects.

Let's get the blame out of the way. I have blogged about the blame game: mainly its the ratings agency, followed by Greenspan and then the Wall Street firms. If you have to describe the root of the current crisis in one word, that word has to be "leverage". If you take leverage out of the equation, if we didn't have the many new fangled acronyms, which were basically packaged loans supported by derivatives like capital platform, we would have a very mild recession. This recession is the severest we have seen since the Depression because of the leverage i.e. de…

Rebalancing The Twins - Update (Oil & Gold)

Well, the psychological $1,000 for gold has been struck. Time to reassess the situation. Still not time to sell as I mentioned that being long gold is absolutely necessary if you are going to play some shares in current times.

The sad part was that I got out of oil futures short position too soon and did not short them again. Fair enough, cannot win everything, but I have been looking to go long on oil futures for the last few weeks and am now comfortable with the level.Hence gold position stays the same, rollover as usual.

Double long new position now:
NYMEX miNY Light Sweet Crude Oil April 2009 $38.575

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Initial long gold position $802
Went double long at $900.6
Average long position: $851.3
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Justification: Going long on gold is one of the safest plays for as long as I have argued since August last year because there are those doomsday scenarios playing out, whereby all assets are worthless, hence gold. I don't subscribe fully to that theory but it makes gold move up for th…

Regulators Need To Fix Dividend & Share Buyback Schemes

Possibly my most important posting this year.... This is not the crux of the problem we are facing but is part and parcel of navigating the "compensation culture" of Wall Street and high-falutin' CEOs. Excessive risk taking has been the center of what brought the credit markets to its knees. The compensation culture is one where the base salary is only a fraction of these people's compensation packages, even though for many of them the base salary is already more than $1m. In Wall street, the culture is even more evident in that analysts and bankers get between $100,000-300,000 as their base salaries but there is a tacit understanding that their overall compensation will be in multiples of their base salary - and not in number of months like the rest of us. Hence many of them argue that the compensation cap by Obama will not work. Its like saying "don't throw us in prison as there are too many of us"...

An article by David Reilly, Bloomberg news columni…

Rating The Top US Banks, Which Are The Zombies?

Came across this very interesting piece by Martin Hutchinson on the current state of the top 12 banks in the US. Which banks are zombies?------------------Please note that the yen rate has scaled above 94 yen to the dollar, for those who are still following my thesis. Refer to posting on January 16, 2009.------------------
There is a lot of information - both about potential bailout needs and possible investment bargains - which we can gain from the banks’ annual earnings figures. For instance:Banks that made profits in the very difficult fourth quarter of 2008 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost).Even banks that lost money in the fourth quarter - an exceptionally harsh three months - have no immediate need for funding, provided they made money the rest of 2008 and seem likely to resume making money going forward.In this context, management’s dividend policy is a good indicator: If the dividend is mai…

Wall Street & Auto Bailouts According To Calvin & Hobbes

The genius of Calvin & Hobbes is still relevant today as it was 15 years ago. The cartoon strip above probably described the current Wall Street bailout excesses precisely. Some would say it applies to the current auto bailouts as well. Click to enlarge.





Market Valuations, Market Bottom & Short Positions

As things get more uncertain, it is useful to look at things that would help us understand the pulse of the market better. The first is the relative market valuations within various sectors or category of stocks. A look at the table below would allow us to form a good idea of the themes and plays in the markets now. Interestingly, the fundamentals indicate that investors have an appetite for risk. Tech stocks and small caps are being rewarded with the highest P/E ratios and these stocks deliver the lowest yields. Investors are pricing large cap stocks with higher yields more conservatively, possibly indicative of the uncertainty. Merrill Lynch analyst David Rosenberg recently revised his earnings forecast for S&P 500 stocks down to $28 in 2009. That puts the P/E for the S&P 500 at 29.5. He also projects operating earnings of $55 for 2010. Applying a classic recession-trough multiple of 12x against a forward EPS estimate of $55 would imply an ultimate low of 666 on the S&P …

Goldman Alumni Cannot Simply Do Everything

Goldman Sachs is the only US independent firm left. The rest, Bear Stearns, Merrill lynch and Lehman Brothers - were not so lucky. Or is it luck? For years, you were golden if you hired from Goldman Sachs.

Associated Press: Alumni of the Wall Street firm have advised presidents from both parties, taken high-profile Cabinet posts, run big businesses and been involved in multimillion-dollar philanthropies.

But recent missteps have challenged the notion that Goldman only breeds winners, The Associated Press says.

Henry Paulson, who was criticized for mishandling the first incarnation of the bank bailout, is a Goldman alum. So is John Thain, who rushed billions of dollars in bonuses to Merrill Lynch employees before the investment bank had to be sold.(Henry Paulson did not handle his Treasury role well at all. The TARP program was changed and modified as he was uncertain on how to tackle the crisis. His biggest mistake was allowing Lehman Brothers to fail. Somehow if it was Goldman Sachs in …