Buy Rotten Eggs for $700 Billion in 36 days
1) The first mistake the Americans made 8 years ago was when they forgot to get the incoming President’s head examined. There is always an intense debate for the suitability of any candidate for the coveted post of the President. More emphasis is always given how the next Commander-In-Chief would act in case of exigencies. No one asked them of their basic knowledge of economics except how much taxes would he reduce.
Visit any Forex traders or option trader’s website – they give you $ 1 million to play a demo game. Never before any presidential candidate was asked to play such demo game in public debate. Never before any presidential candidate was asked what will you buy if you were given $700 billion of Taxpayer’s money?
However, on the historic Sunday, 28th September 2008 to be precise, a bipartisan agreement was arrived at to authorize the President Bush to succumb to the wishes of the Treasury Secretary Hank Paulson to spend $700 Billions of tax payers’ money to buy rotten eggs lying in the vaults of Banks and Brokers in his last 36 days!
When a person is dying, his last wishes are asked for by the relatives circling on him just to listen how much he would get if that fellow dies. When a criminal is condemned to death, his last wishes are asked for before his head is shaven off in preparation for his journey to the death. Hank Paulson did not have to have his head shaven off. His wish was $700 Billions – and America’s most retarded President in the history granted the wish to spend $700 Billion in 36 days! He was joined by the chorus of congressmen/women to tell their Commander in Chief – Yes Sir. The President said – I did not hear you! The congressmen raised their pitch – Yes Sir, Yes Sir, Yes Sir.
Ask any businessmen or any person of ordinary prudence – would he give his departing employee even $700,000 of authority when he has already resigned and counting his last 30 notice days? Of course No, then how come the President of United States hands over blank checkbook to his Treasury Secretary with unchecked power of $700 billion when he is counting his last 36 days?. If something goes wrong later – Mr. Paulson would say” I have right to remain silent.” Look at the bill you have passed in the Congress. – No questions to be asked. Period.
Only a few months ago, the President Bush with great fanfare distributed Tax Rebate checks to American citizens amounting to $106 billions only to withdraw $ 700 billions from their and their future generations’ pocket on today (28 Sept 08) like a conman. During his presidency, over 4000 soldiers lost lives in Iraq, 1000 more in Afghanistan, over a million innocent people died in Iraq, Twin towers of World Trade Centers were destroyed, billions of dollars of budget surplus was converted into whopping deficits, US Dollar dropped by 40%, hurricanes destroyed several cities, wildfires raged in and tons of mud sided in California, millions lost jobs and homes, oil prices rose from low 30s to high 145, and industries collapsed one by one – from Auto, airlines, healthcare, Medicare, insurance, brokers, investment banks, and banks for only one reason. He was thoroughly incompetent.
Now, let us consign all events until today’s night into history, and focus what will or could happen from now on to the financial markets around the world. Here are the posers and possibilities.
| Is it a done deal? Will it become a law? | |
| Preliminary agreement is struck. While leaders have agreed, it is not known whether the rank and file senators will vote for the bill. They have been getting angry response from their constituencies to vote against, There have been street protests in California, Anger is building up which may become violent. US is heading towards unrest and then civil war in a few months. | |
| Q: | What will happen to the market? |
| A: | Paulson wanted to get the bill signed by the President before the world market opens tomorrow. He expects the market to give solid response. However, the market is always an unpredictable beast. World markets do not act on themselves. They wait until the US market opens. Further, the market movement depends on the major brokers. As you are aware, most of the leading Investment banks like Bears Stearns, Lehman Brothers and Merrill Lynch are either in the coffin or ICU. The credit crunch is so much that most of the brokers do not have money to pump into the market and take their proprietary position.
However, Goldman Sach and Morgan Stanley, now being banks, will be given billions of dollars to buy into overseas markets, especially near day close, if the markets do not move up strongly in the morning trades. |
| Q: | Will the bank start lending and reduce the liquidity freeze? |
| A: | Doubtful. Most banks from Citibank to UBS have raised capital from the market in the form of High coupon (9% to 11%) preference shares in billions of dollars. They will be forced to retire high cost debt, leaving little in their coffer.
Further, more and more debts are being generated in the market due to sub prime default that makes more and more derivatives doubtful. The banks will be forced to pay to the counterparty in respect of future obligations. It can not plead that it does not have money. The creditors may sue the banks to either pay or file bankruptcy. There is no chapter 11 for banks, only Chapter 7 and 13 that compulsorily winds up the company.
The mistrust has been built into the market so much that the counterparty risk has risen to the highest level. Under these circumstances, the interbank transactions will remain low. The collapsing banks in USA, UK, and rumors of failures in centers like Hong Kong, will continue to make the market difficult for lending.
Corporate lending may take a while. The commercial paper market has become like a junk bond market with interest rates running in high single digit to low double digits even for blue chip customers. The real interest rates are perking up. |
| Q: | What happens to the Equity markets? |
| A: | They will open high but then retrace after 2 hours, again peaking up near the close due to US funds buying with billions of dollars in blank checks.
The real rally may come only after the reaction of the US market. Tuesday may be stronger than Monday, provided no negative news emerges on deal front. |
| Q: | How the markets may react? |
| A: |
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| Q: | Does it mean that USA is on recovery path? |
| A: | Absolutely not. The manipulative effect does not last longer, especially when the trillion dollar scale is considered. The States and Local government who need over $200 billions to manage their state, may raise their ugly head and demand payment when 3 times more money is given to bankrupt banks. USA is receding into civic unrest and Civil war slowly and surely. |
| Q: | Is there severe discontent among Americans at the current Bail Out plans |
| A: | Americans are damn angry. They are losing jobs, homes, healthcare, Medicare every thing… They have now converging on the streets with big banners. If the bill is passed into law, they will flare up, and the anger will spread across the nation like a Californian wild fire. Since guns are freely licensed in USA, there is likely to be mayhem and the ordinary civic unrest will escalate into full scale Civil War. They have to ban gun immediately before situation worsens.
This may happen swiftly, even before election. We should be very happy that it does not happen; In fact it should not happen or should not be allowed to happen. For the first time, US Administration will have to use bullets on their own soil to kill the American themselves instead of killing millions of peoples abroad in self engineered war of massive scale. |
| Q: | What should an Investor do now? |
| A: | This is pet line of CNBC in its advertisement for which they never reply. The present scenario is very unstable, and changes from moment to moment. It is more akin to war. Deal with it as it comes. No planning is going to work, except holding some portion in gold. |
| Q: | Is there any solution to the present mess? |
| A: | Of course, yes. The trouble right now is that no one knows what has suddenly happened and why so swiftly. Watch for my book “Sub Prime Resolved”: that contains complete solution and also wait for my next article here – How we got here? Legalizing Parallel Economy” |
| Q: | Are we to worry about every thing? |
| A: | No. The problem will take care of itself. For every problem, there are 10 solutions, One has to find it. I have found them, and sent out a letter to appropriate authorities who received them by FEDEX on 25th August, 2008, but they did not reply. Who is by the way Kalidas? Never heard of him. |
Kalidas, Hong Kong
29/5/2008
2)
Physical gold is always better than paper gold like ETF in overseas centers are like Hong Kong where the banks have been infested with hundreds of derivatives. No one knows the status of broker or bank where the paper gold is being kept.
India is a different ball game. Physical gold is difficult to trade. The banks only sell the gold, never buys back, so it is not so liquid. Further, banks like HDFC charge almost 10% premium to local prices. If you buy physical from gold merchant, there is no guarantee of its quality, though they do contain some marks. In Hong Kong, we have protection on the quality, and all gold dealers by law are required to imprint the purity and weight on the gold bar or coin like “lagdi”
An ETF fund like Quantum Gold Fund, which imitates phycial gold, appear a better choice. I used to own this fund a couple of times. As per charter, they are supposed to invest only in physical gold and not in derivatives. If they can mainatain that, they are safe. However, what is the guarantee of the funds holders if the managers make a wrong move and start buying derivatives? The reputation of this fund is high and there is no premium to the spot price of the gold. It is therefore good substitute to physical gold in India only, where I find no other problems similar to world over.
Further, this ETF can be kept in Demat form which is Government of India sponsored depository. So even if the broker goes under, your holding is safe. Please check with your broker that it can be kept in Demat form (I did not check it, though I bought it 3 times in the past and sold them later at profit)
3)
for Ojal Suthar
Calls and Puts (if bought only) are limited liability hedging strategy, if used with stocks held. Otherwise, they are speculative with limited downside. If one writes covered call, it is again conservative approach, quite safe. If one writes put to receive the premium, without buying out of money put, then it exposes investor to more risk.
If you get good premium in writing puts, and there is little premium in out of money put, it is better to do both to earn slightly less but limit downside. If you want to have more upside at the same time, you may buy additionally out of money call to enhance the return.
In India, the option market is not so good. The strike period and price are not long enough. I therefore normally do not advise on such options or futures trades. Out of money calls and puts are also highly illiquid. I therefore do not participate or advise and investor on strategy.
In USA, the market is very sophisticated. You can have even long term calls and puts extending up to 3 years. One can also take small or large position according to his capacity. In India, each call and put represent certain minimum lot, that makes India a highly speculative market alone.
4)
for Sukaina, Manjunath
Please see my new post summarizing today’s events. For your position of IFCI, I also bought some at about 32/33 level today. To me, today’s rejection of Bail Out package was extremely good event and it displayed the American Citizens’ maturity over so called Wall Street’s expert intelligence that brought down the whole market.
On one hand, there was a bail out package for $700 billions of which only $250 billions were disbursable immediately for which bill was put up before congress for its Authority. Whereas FED at the same time distributed and pumped in $673 billions into the money market to ease the liquidity - under whose authority? When you do not need authorization for $673 billions, why do you pretend seeking authorization for just $250 billions of bail out package?
Read my article to avoid duplication and out of context reference.
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