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Showing posts from September, 2008

Looking Past the Crisis

ByDavid Sterman, Interim Portfolio Manager

If you take a quick snapshot of key economic indicators, you'll see that there is obviously plenty of reason for concern. But a more liquid banking system, falling energy prices and the sheer resilience of the U.S. consumer could set the stage for the next upturn to begin in 2009.

It's an old investing axiom that the market looks six to nine months ahead, so the timing of an economic bottom and eventual turnaround is likely to dominate market discussions in coming weeks and months. Let's take a closer look at the current headwinds and possible eventual tailwinds.

* Technology/semiconductors: Book-to-bill for semiconductors fell to just 0.83 in August 2008, down 37% from August 2007. Flat-panel TVs, GPS devices and iPods were key demand drivers for tech and chips in recent weeks. Those segments have matured, and it's hard to spot the next hot trend. Consumer PC technology is no longer making radical leaps, and consumers are up…

When's the Right Time to Invest?

It's not surprising that first-time investors often worry about the timing of their initial stock purchases. Getting started at the wrong point in the market's ups and downs can leave you staring at big losses right off the bat.

But take heart, Fools: Whenever you first invest, time is on your side. Over the long haul, the compounding returns of a well-chosen investment will add up nicely, whatever the market happens to be doing when you buy your first shares.

Don't Waste Time

Rather than fretting about when you should make that first stock purchase, think instead about how long you're planning to keep money in the market. Different investments offer varying degrees of risk and return, and each is best suited for a different investing time frame.

In general, bonds offer smaller, more dependable returns for investors with shorter time frames. According to Ibbotson, short-term U.S. Treasury bills yielded roughly 3.7% per year from 1926 to 2003. (We picked 2003 as an endpoint…

Buy, Sell, or Stay Put? Advice from the Pros

By Amy Feldman

If you're feeling pummeled by market mayhem, you're not alone. With Lehman Brothers (leh.) filing for bankruptcy, Merrill Lynch (NYSE:MER - News) selling out, and AIG getting a government bailout, investors have been knocked for a loop. Financial advisers have been fielding phone calls from panicked clients, but the smarter ones called their clients first to put things in perspective. "My issue with my clients is: Are they getting to a place where they cannot sleep?" says David Diesslin, a financial planner in Fort Worth. BusinessWeek spoke with more than 15 of the country's top financial advisers to find out what's keeping their clients awake at night. Here's what they're telling them to do about it.

Should I pull my money out of the market?

In short, no. With the Dow Jones industrial average down 4.4% on Sept. 15, and off 22.9% from its peak last October, investors are undoubtedly watching portfolios shrink. Right now, it's hard to s…

Bondsellers may get lawsuits

HONG KONG - HONG Kong investors who bought complex financial products backed by collapsed US investment bank Lehman Brothers were considering suing the institutions who sold them, a lawmaker said on Tuesday.

Investors argued that the banks who sold the instruments guaranteed by the failed Wall Street titan did not fully explain the high risks associated with the products.

'The investors are considering mounting legal action against the banks for misrepresentation,' Albert Ho, chairman of the Democratic Party and a lawyer, told AFP.

Many of the investors, who paid a total of 12.7 billion HK dollars (S$2.30 billion US), had been sold mini-bonds which are based on derivatives linked to major firms' stocks but are worthless if the guarantor goes bankrupt.

'These products used to be sold by only investment banks to clients who had at least 1 million US dollars,' said Mr Ho.

'But a few years ago, commercial banks wanted to snatch a piece of the pie and started to convince…

US risks a recession

WASHINGTON - FEDERAL Reserve Chairman Ben Bernanke bluntly warned Congress on Tuesday the United States risks a recession, with higher unemployment and increased home foreclosures, if lawmakers fail to act on the Bush administration's plan to bail out the financial industry.

Mr Bernanke told the Senate Banking Committee that failure to act could leave ordinary businesses unable to borrow the money they need to expand and hire additional employees, while consumers could find themselves unable to finance big-ticket purchases such as cars and homes.

Mr Bernanke's remarks came in response to a question from Senator Chris Dodd, a Democrat and the committee's chairman, who seemed eager to hear a strong rationate for lawmakers to act swiftly on the administration's unprecedented request.

'The financial markets are in quite fragile condition and I think absent a plan they will get worse,' Bernanke said.

Ominously, he added, 'I believe if the credit markets are not func…

Short-selling ban stuns hedge funds

Many lose a fortune and could fold up in the coming months

Published September 22, 2008
By NEIL BEHRMANN
IN LONDON

HEDGE fund short sellers, caught in Friday's bear squeeze, are believed to have lost fortunes. Many of them are expected to close down in coming months, analysts say.

Although a minority of hedge funds and traders made fortunes when Wall Street, London and other global markets soared, bears were caught unawares by the dual action of the US Securities and Exchange Commission (SEC) and the UK's Financial Services Authority (FSA). Both regulators, followed by Ireland and other European countries, clamped down on short selling.

Hedge funds, investment proprietary traders and other speculators had borrowed shares and sold them, aiming to profit from further price declines. Futures, options and other derivatives were also used to profit from a further market slide.

Instead, the short-selling ban caused an acute bear squeeze, forcing hedge funds and other bears to buy back shar…

Recession may hit S'pore

SINGAPORE may slide into a recession as slowing global economic growth undermines demand for the city-state's exports, the finance minister said.

A recession - typically two consecutive quarters of economic contraction - 'cannot be ruled out,' Finance Minister Tharman Shanmugaratnam said through a spokesman in an emailed response to an Associated Press inquiry.

'We had to expect slower growth than previously expected, given the downward adjustments in the US, Europe and even parts of Asia compared to expectations just 3 months ago,' Mr Shanmugaratnam said.

Singapore's economy grew 2.1 per cent in the second quarter compared to the same quarter a year earlier, down from 6.9 percent growth in the first quarter.

Last month it lowered its growth forecast for this year to between 4 per cent and 5 per cent.

Mr Shanmugaratnam said it was too early to revise the forecast again 'given the extreme fluidity of developments in the US currently.'

Earlier on Monday, Singa…

5 Lessons for the Next Financial Mania

By Rick Newman

Why do we keep relearning the simplest rules in the world?

Buyer beware. Cut your losses. What goes up must come down. If it seems too good to be true, it probably is. No matter how complex the market meltdown of 2008 might seem, all of these simple aphorisms--clich├ęs, really--directly apply.

Of course, in every financial free-for-all--whether it's the S&L crisis, the dot-com bust, the Enron fraud, or today's housing-related meltdown--the chicanery takes a different form. On Wall Street, they call that "innovation." But right now, innovations like credit-default swaps and mortgage-backed securities look more like old-fashioned pyramid schemes: I'll take your money, you take somebody else's, and eventually some guy neither of us knows (or the government) will get stuck holding the bag.

Here's a guarantee: Wall Street will "innovate" again. A lot of guys in expensive suits will make a lot of money for a while. You'll want in, ev…

Banks gave poor advice

ASIAN retail investors who bought structured products linked to the collapsed USinvestment bank Lehman Brothers are complaining about poor advice from banks and have urged authorities to save them from losses.

Investors in Hong Kong, Singapore and Indonesia have over the past week been outraged that the bond-like products they purchased were actually complex derivatives and they stood to lose most or all of what they had invested.

The products include Lehman-linked minibonds sold in Hong Kong and Singapore, many of which offered modest returns of between 4 and 6 per cent, and DBS Group's High Notes 5 series, which offered around 5 per cent and were linked to eight securities including Lehman bonds.

After staging a protest on Sunday, dozens of aggrieved retail investors turned up at the headquarters of the Hong Kong Monetary Authority on Monday morning to seek help from authorities, complaining that banks and financial advisers did not do enough to warn them of the risks.

Mr Tan Kin Li…

Turmoil to worsen: Wen

BEIJING - CHINESE Premier Wen Jiabao has warned the global economic slowdown and financial turmoil may get worse, pledging more flexible policies to maintain the country's growth, state media said on Monday.

'The international financial turmoil and the slowdown in the world's economy could worsen, and we cannot underestimate the impact of these changes on the national economy,' Mr Wen said, according to the Shanghai Securities News.

'We should improve the effectiveness, focus and flexibility of macro-control measures... to maintain the stability of the economy, the financial market and the securities market.'

It is particularly important to 'find the balance between maintaining steady and fast economic growth and curbing inflation", he told a meeting on Saturday with provincial and ministerial leaders.

China's economy expanded by 11.9 per cent last year, and cooling efforts have already seen growth slow to 10.1 per cent in the second quarter of this ye…

The end of an era

NEW YORK - GOLDMAN Sachs and Morgan Stanley brought down the curtain on a Wall Street era on Sunday, agreeing to a radical revamp that completes the biggest overhaul in high finance since the Great Depression.

The last two major independent investment banks in the United States will become holding companies, a rescue move which accepts the kind of government regulation that Wall Street's top high-rollers long fought bitterly against.

Even as the United States announced a US$700 billion (S$999 billion) bailout to save financial institutions, the firms themselves asked for the change as one after the other of their rivals were swallowed up in the global financial crisis.

The move submits both firms to significantly more regulation and will limit the massive profits that spawned a culture of high-risk finance and made them, along with other investment banks, the envy of Wall Street.

As holding companies, both firms will have easier access to credit to survive the current crisis - unlike …

Why Wall Street Hates Gold and Silver??

(Excerpted from Chapter 12 of How to Prosper During the Coming Bad Years in the 21st Century.)

Wall Street ignored gold and silver during most of the 1970’s hyper-profitable bull market. They were either outright hostile, or acted as though the metals didn’t even exist. I got no respect, even though the first edition of my book sold 2.6-million copies and was near or at the top of The New York Times best-seller list in both hard and soft cover for two years, and I was all over the media; Wall street Week, Oprah twice, Regis and Kathy Lee three times, etc, etc. They were usually hostile also. Wall Street paid little attention to gold until it reached about $650, far too late for them to have much of a chance for their clients to make money.

Why the hostility? Partly because they believed their own rhetoric! Historically, because rising gold always means falling stocks or a troubled world, and they made most of their commissions in the stock market, they had to remain bullish on stocks, a…

10 things you should know

Couldn't keep up with the twists and turns that took place in the financial world last week? Here's a primer
By Ann Williams

1 THE FALL OF LEHMAN BROTHERS

The week that broke Wall Street began with Lehman Brothers. On Sept12, news broke that the fourth- largest investment bank in the United States was on the brink of collapsing due to bad mortgage assets. Lehman was scrambling for a buyer as customers and trading partners fled.

No deal, however, was reached during that desperate weekend. Lehman's chief executive had waited too long to sell the firm, and everyone was now afraid to buy.

The US government, its last hope, kept to its word and refused to bail Lehman out.

Just after midnight last Sunday in New York, Lehman announced it would file for bankruptcy, the biggest in history.

It was around midday last Monday in Asia, and immediately the carnage on stock markets began as investors dumped bank shares.

Lehman's fall showed that the US government would not automatically preven…

Good comment by CNA forumer: Sessam

The worse may not be over because the details and reactions of global markets to the latest Paulson initiative are still so uncertain. What the Americans hope is that taking a more definite stand on a "final solution" and the restriction on short sales for a time will confer some stability on world markets. Their first objective is to prevent further deterioration of assets held by their financial institutions so that they can restructure themselves by selling of assets at reasonable prices to recapitalisation or by M&As.

We really don't know for sure what will be ahead, and one hope that the rises in world markets these 2 days after the announcement of the Paulson plan are returning confidence in the American ability to see through the crisis. But expect a lot of volatilities still...for it is still early days.

Costly intervention could narrow government's economic options later.

By Mark Landler

THE NEW YORK TIMES

Saturday, September 20, 2008

WASHINGTON — The rescue plan being created by the Bush administration is much like the financial crisis it is meant to end — complex, far-reaching and potentially rife with unpredictable consequences.

Among the dangers cited by economists Friday, as word of the plan began circulating, were an explosion in federal debt, higher financing costs, an escalating reliance on foreign capital, higher inflation and a further erosion of American economic sovereignty.

All of these dangers, these experts say, are hypothetical — except for the cost, which by some estimates could eventually exceed $1 trillion. Taking on that much additional debt could narrow the economic options available to the next presidential administration.

"The implications are that, at some point, you're going to have to see higher taxes, lower expenditures or a combination of both," said Carmen Reinhart, a University of Maryland economist.

Not all of the…

Ban on Short-Selling Will Hurt Rather Than Help Brokerage

Courtesy of CNA forummer: Johnlaw

New measures to shore up the markets are coming so fast and furious that it is becoming hard to keep track of them. What most people do not realize is that they produced some not-very-pretty unintended consequences. As we discussed (courtesy reader Lune) at the time:

1) Congress raises conforming limits on Fannie/Freddie to help unfreeze the mortgage market. Result: agency spreads skyrocket, bringing down Bear and a host of hedge funds. Mortgage markets still remain frozen.

2) Fed opens TSLF to unfreeze mortgage market. Result: Carlyle goes bankrupt as people rapidly arbitrage the difference between holding MBS in firms that can and can't access the new credit facility. Mortgage markets remain frozen.


Note the spike in agency spreads and bankruptcy of Carlyle helped precipitate the run on Bear.

In fact, as Richard Bookstaber discussed at length in his book, Demon of Our Own Design, this sort of unintended consequence is precisely what you'd expect …

Reasons why the bailout might not work

Courtesy of CNA forummer: Johnlaw

The aim is two-fold. The government hopes that by buying these mortgages, enough debt will be removed from the balance sheets of banks to enable them to recapitalise and resume lending, something they have all but ceased doing since the subprime housing market collapsed. This, hopefully, will stem the precipitous drop in property prices, which has resulted in more and more homeowners defaulting on their mortgages. Secondly, the government hopes to sell these mortgages once the market recovers. If housing prices do cease falling and people resume buying homes, then the US stands to make a substantial profit from the mortgages it now holds.

But the US economy’s woes are not limited to merely falling home prices caused by a stagnant lending market. Nor will the removal of these bad debts guarantee that banks will become profitable again. Unless banks are able to return to their core business and resume lending, they will continue to fail, this bailout will…

Asia casts nervous eye on US financial turmoil

By KELLY OLSEN,AP Business Writer

SEOUL, South Korea - Han Seung-woo is casting a wary eye on the financial crisis erupting halfway around the world on Wall Street.

From garment makers in southern China to real estate agents in India, businesses across Asia are worried that the turmoil will filter through to them.

"I'm watching nervously," said Han, the president of Sam-A Techno Solution, a technology services company in Seoul with 10 employees and annual sales of 3 billion won (US$2.7 million).

Even before the past week's dramatic events, the economic slowdowns in the U.S. and Europe were dragging on Asia's biggest economies in Japan, China and South Korea. Now, the worry is it could get worse.

The fears highlight the growing realization that Asian economies have not "decoupled" as much from their longtime dependence on the U.S. market as some had previously thought or hoped.

"Right now people somehow conclude that decoupling is a myth," said Citib…

Credit Default Swaps: The Next Crisis?

As Bear Stearns careened toward its eventual fire sale to JPMorgan Chase last weekend, the cost of protecting its debt, through an instrument called a credit default swap, began to rise rapidly as investors feared that Bear would not be good for the money it promised on its bonds. Not familiar with credit default swaps? Well, we didn't know much about collateralized debt obligations (CDOs) either — until they began to undermine the economy. Credit default swaps, once an obscure financial instrument for banks and bondholders, could soon become the eye of the credit hurricane. Fun, huh?

The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal …

Structured Products

"If you don't understand it, then don't buy it"

-- Investing legend, Warren Buffett


A BRIEF HISTORY



Structured products include structured investments, structured deposits, capital guaranteed funds and capital protected funds. The word "structured" is rarely used in the marketing and they are usually sold as unit trusts or ILPs (investment-linked products). Most are distributed mostly by banks although insurance companies have recently entered the picture.



In the 1990’s, they were a way for rich individuals and institutions to structure investments to get their preferred mix of risk, return, liquidity, income and capital gain. This was useful.



As issuers got good at structuring, they expanded to the mass market. But how to make a customised product for each and every small investor? It seemed impossible.



It didn’t take long to find a way to “customise for the masses”. The newly developed structured products appealed to the masses and had similarities to gamb…