The next major insurer to fail or come into serious problems will be, hold your breath, General Re, a reinsurer owned by Warren Buffet. Mr. Buffer thought it to be safe investment when he bought it (and I instantly commented to my clients that it was Buffet’s biggest mistake) and lost billions of dollars later. Safety of an investment is a relative concept. Today’s safe heaven becomes a hell later – look at US dollar, once considered a safe heaven at the time of war.
Today, every broker is rushing to associate with a bank in USA. Bears sterns merged with JPMorgan; Merrill Lynch with Bank of America, Lehman was allowed to fail, Morgan Stanley is considering merger with a bank in spite of being very profitable and Goldman Sach too is considering merging with some bank like HSBC or Citibank or Duetshe Bank. At the same time, some banks like UBS want to disband the brokering operation (called in decent words – Investment Banking and Brokers are called Investment Bankers – the way prostitutes are called Call Girls or Escort girls)
The reasons? Almost all brokers or Investment banks carry on their off balance sheets books massive liability in the form of CDO, CDS or CLN most of which have ZERO value. The amount runs into hundreds of billions.
The brokers do not have money nor can they raise the capital despite major claims. Lehman Brothers lost $ 15 Billions and raised successfully fresh capital of $13.9 billions; if that was so – why did it go bankrupt when it raised the money? Where the money gone? Or really the money came in as promised by investors? Or that capital was raised only on paper by way of announcements to boost the confidence?
The brokers or Investment Banks can not resort to Chapter 11 of Bankruptcy Protection. They have to go through only Chapter 7 which is a compulsory liquidation. Further, US government has guaranteed the assets of individual to the extent of $ 500,000 (if investor has account with Security firm) or $ 100,000 if he has account with the US bank. It makes sense for US government to let the broker merge with bank so that its liability could reduce by 80%
Further, FED can not extend the credit line to Brokers or Investment Banks directly. If brokers merge with the bank, then FED can finance fully through the bank. So, by merging the brokers with the banks, FED can extend helping hand through banks.
Further, brokers’ business depends on OPM or Other People’s Money. They can not survive without credit lines from the banks. In today’s scenario, almost all banks have withdrawn or severely cut down the credit lines to the brokers. Look at the Bear Stearns. Until last moment, its CEO was informing CNBC interviewer that its firm was safe. In less than 24 hours, all banks withdrew the credit lines to BS with the result that very next day, BS was declared bankrupt.
Merrill merged with BOA because its credit lines were obviously withdrawn. Without merge it could not have survived and filed for bankruptcy. Morgan Stanley is facing similar situation. I do not understand why Goldman Sach also suffered same fate. It is the most dangerous Investment Bank on the planet. That is the single firm who can manipulate the entire US and World market with massive manipulations. It is the biggest insider trading firm, because it gets first hand reports from Treasury Secretary who was earlier President of Goldman Sach. When almost all brokers and investment bankers lose billions of dollars, how come Goldman Sach make money at the same time? How can they be correct all the times on their calls? Because they have mole in the white house.
Does the present run of merger with the brokers and banks will solve the problem? Of course not, it will compound the problem. The ZERO assets are now transferred from brokers to banks. The circle in the water gets bigger and bigger with every stone falling into it.
This is why the solution to the present crisis is not coming to an end soon. The losses in the system now exceed US$ 8 trillions whereas just 7% is disclosed to the market. It is like an Iceberg. 9 parts below water and 1 part only visible. If Titanic hits it, it sinks.
Worse days are yet to come. A time may come when even Gold prices will rise by $ 100 to $ 500 rise in just one day, with Gold prices reaching almost $3000 in no time.
Fortunately India is the only place in the world, which is relatively safe. Cows are really holier than pigs and chickens. Brace up for more defaults everywhere.
Kalidas, Hong Kong
Ref: 09-083
2)
for Khem cho,
you are right. However, their surplus is stored not in official US dollars. There is a strong possibility that they might suddenly lose their entire savings in just under one day. They should move out of such holding into real assets like Gold or Silver which is universally exchangeable commodities. If they do not do it now, they stand to lose 70% of what they earned in last 18 months.
I can not amplify because it is vital subject for one of my chapters of the book that I have written that is yet to be published.
Kalidas, Hong Kong
19/9/2008
3)
for chchch
You are dead right on spot with the qualification that RBI does know what ICICI is doing. Most of the losses of ICICI is concealed in overseas subsidiaries such as ICICI Canada. US regulations does require ICICI to use MTM principle or Mark to Market securities held by ICICI like CDO, CDS which have ZERO investment value. ICICI says that it does not have to make provision because it adopts HTM principle or Hold Till Maturity to value its long term securities. These securities have ZERO value - so what makes difference whether ICICI values its portfolio on HTM basis? Zero is Zero whether you hold it for one year or 30 years.
What ICICI chief Kamath is doing is to buy time till he departs. It will be new Chairman to deal with the trouble, just as President Bush is paying for what was done by President Clinton and his favoured and scoundrelish Treasury Secretary Robert Rubin who now heads Citibank and who played active role in promoting and managing companies like Enron or LTCM.
Only other day, some press report suggested that ICICI's London exposure alone amounted to a loss of US$ 400 to 500 Millions, that is, about Rs 2200 crores. In my estimate, the total losses of ICICI bank could be well over Rs 25000 crores. This is why it was raising capital last year at every few months in the form of right issue, convertible bonds in every form of currency from US$ to Japanese Yen. ICICI management has consistently avoided informing the investors what is the level of their exposure to exotic derivatives like CDO and CDS. This bank even passed on some of the derivatives to corporate customers who are facing lawsuits from ICICI bank for recovery of dues on securities which have gone into total loss.
Kalidas, Hong Kong
19/9/2008
4)
for maju_blore
You are right. Real pain is yet to be revealed. Trillions dollars of losses can not be resolved with just floating of separate company with just $500 billions of fresh funding. US is throwing good money after bad money.
Mr. Paulson said that he will buy bad toxic debts from the banks at about 35% discount or paying $65 for $100 value of bad debts. He will hold it for some time and then sell it at profit after few years.
He is downright stupid. The assets he is going to buy is having ZERO value. Whether he holds it for one year or 100 years, does not make any difference. Zero does not become Hero.
A company like AIG is having unrecognized bad debt of about $ 1.47 trillions. If the company is making $ 5 billion profit on normal terms, it would take almost 300 years to recover the principal amount, interest is not even counted.
US economy is more like a patient in 'coma' . No one will know when he will come out out of coma.
My letter merely gave basic information of my contents of letter to the President. Neither Paulson nor Bernanke can dilate on this one. Stealing of idea is not possible, although they may get some hints. My solution is very dynamic, task specific, and addresses to the core issue in great details. I have also quantified how much US will benefit. They can not anticipate what is in my mind.
Kalidas, Hong Kong
21/9/2008
5)
for amarawargaonkar
If you do not buy any share generally, does not matter, but you should keep the market on study on continuous basis.
It may be noted however that you should see the stock specific situation very closely, and should buy those stocks in severe corrections, regardless of the state of the market.
For instance, I had suggested buying of all State Owned Refineries (HPCL, BPCL, IOC) at the height of oil prices at around 145, and stay away from other popular private sector refineries stocks like RPL. See what has happened - State Owned Refineries stocks have moved up by 30% whereas RPL has declined by 20% when the market corrected violently by over 2000 points (forget last two days rally)
During your absence from the market, identify the stocks you would buy. Select only powerful stocks of large caps. When those stocks come down on their own due to problems relating to their industries, (not their individual problems)pick them up slowly and hold on to them in spite of the market state where it is now.
HPCL came down to as low as 180 (ignore one day low of 164) at the height of oil prices ($145)- Today, the market is down, oil is down, sentiments are down but HPCL is up Rs 240 (up by Rs 60 or 35%). what is going to happen to HPCL - is it going to disappear due to failure of AIG or other banking stocks in USA?
What I am saying is that be discreet. Do not be afraid in taking a position in specific stock which has much higher potential long term and hold on to them. Stocks like HPCL yield over 10% at the time they were trading at Rs 180 or about. Do not bother to buy at all time low - it never works. When the stock rebounds by about 15% from all time low, pick them up. When the stocks are going down, there is no guarantee that they will not go down further.
Do you know how a cricket batsman hits boundry or six using half volley? He hits when the ball after hitting the ground bounces a little leaving him room to lift it to the boundry. that is he is hitting on rise, not when the ball is still falling to the ground. You have to allow the downward momentum of the stock to die down and some upward momentum starts to pick up the rising trend.
The reason I wm writing this is because it is impossible for me to advise every boarder individually when he heeds my call not to buy, because I have no idea what every boarder is doing by himself.
Above method should help you in selecting the stocks and then wait for the time to pick them up.
Kalidas, Hong Kong
21/9/2008
6)
for hembhat
I disagree. Almost all lenders who hold CDO, CDS and CLN are secondary debt holders without recourse. The security they rely on has already been seized and sold by the Primary Lenders. Nothing is left for the secondary mortgage holders.
I still maintain that the value of almost all secondary mortgaged backed securities are big ZERO and they run into trillions of dollars.
When Paulson says that he will invest $ 700 billions in such Mortgaged Backed Securities at discount of 35% so that he will lend 65%, he is making terrible mistakes. What he will invest $700 billions will instantly become ZERO. It is like he is putting the newly printed money into giant black hole.
If this package is approved by the Congress, it will be challenged by many Senators in Supreme Court. This is unconstitutional. The constitution of United states does not permit unfettered and unquestionable rights to the unelected public officials like Paulson or Bernanke. These two officials will break the back of the United States in just under 12 months.
Will the market rally - sure it will - but this time around the biggest enemy will be the interest rates which are galloping. The $700 billions will go into bad assets, not for the formation of new assets or new loans. In short term, the knee jerk solution may work in favor of the market, but Long Term Interest rates and gold will shoot up beyond any imagination, which will ultimately force major correction in real and visible terms. Right now, neither Paulson, Bernanke or Congressional leaders do not know what has hit them. If they do not know the problem, how are they going to work out the solution.
If any nation can print its way out all the time, then there will be no monetary discipline anywhere in the world. If they lose, print more money will be the new and most modern Paulson-Bernanke theory of Economics and they might qualify for Nobel Prize for the Most Idiotic Economic Theory.
Do you know that Arnold Schwarzenegger, the Governor of California, has pledged NOT to move out of capital, that is, Sacramento, UNTIL the congress passes his deficient budget. That runs into few billions whereas same Congressmen will be asked to approve $ 700 Billions of budgetary allocations in the name of expediency to be thrown into ZERO value toxic debt securities. Do you think that those states, who collectively need $200 billions and are currently borrowing @ 20% from bond market will listen to Paulson and let him distribute nearly 3 times their requirements in just a flash? There will be simply revolt.
I therefore mainain my original position that the Bad Debts carrying Mortgaged Securities are having ZERO value (for secondary holders who constitute 98% of total such debts)
Kalidas, Hong Kong
21/9/2008
7)
for Guest (Gangadhar)
There is a 'prakriti niyam' that if someone dies, someone gets borne other side'. When the financial institutions are finally having near bankruptcy days, the cries for reform will be at its pitch. All old financial models will be thrown out and more regulated system will be enforced. There will be so much work to be accomplished in such short time that Indian software firms will get almost double the work to be completed in 1/4th of time. right now, the time is essence for US survival or let us say to avoid precipitate meltdown.
The man on the street in USA is not that affected. the present problem is concentrated only to finance sector - other sectors are fine. I just returned from USA (California after almost a month) and I did not see any panic in the street, but lot of 'help needed'' boards in most of the stores , though my son told me the salaries are not that high and they are mostly part time vacancies.
Yes, there will be heavy job losses in New York and Chicago - the two major financial centers.
India is mostly domestically dependant economy. Do not go by dollar value. In India, the same cup of coffee is available at Rs 6 to 10 in ordinary restaurant whereas in USA it costs minimum Rs 60 or 80. GDP in US looks more in USA in dollar terms. However, in terms of quantity, the consumption in India is more. Afterall, we have 1 billion mouth to feed against 300 millions in USA
However, some sectors like textiles, diamond, leather goods that depend more on exports for survival will be affected somewhat. Those companies who quickly adjust to Indian market as replacement, will do well.
I therefore believe that software industry will get more orders after initial hiccup. When the full details of the new regulations are known, the Indian companies will start getting even larger orders. This industry will prosper more in recession than at present.
kalidas, Hong Kong
21/9/2008
8)
No, In India, deposits are secured under Deposit Insurance corporation to the extent of Rs 1 Lakh per account.
further, the RBI and GOI will be behind to save the ICICI in case of any trouble. At the moment of writing, the risk is least.
Kalidas, Hong Kong
22/9/2008
9)
for Leave it
I do not know under what name Lehman bought the shares or invesed into Indian market, and which unit is bought by Barclays. If the unit is under Barclay's take over, the selling may be light.
However, if the unit is part of remaining Lehman in Bankruptcy court, then you could see the selling of those counters. It may be orderly selling under court directions.
If the markets do tumble, inspite of $700 Billions blow out by Paulson & Bernanke, there could be all round selling again, beginning from 2nd October onwards when the short selling ban on 799 financial shares in USA comes to an end (unless extended)
If the market rallies in financials, and they go up by 70% from all time low (they have already gained over 25% on Friday alone), short sellers will be too pleased. If they can sell Citibank at $ 15, why would not they sell more aggressively when it is at $30?
Paulson's plan is nothing but a Poison Pill. All the estinmates made by me earlier, have become a reality.
Kalidas, Hong Kong
22/9/2008
10)
for Champion224
Even if you deal with ICICI Direct, your securities are in the official custody of NSDL or National Securities Depository Ltd. What you may suffer, in case of difficulty, is the pending settlement transactions. I therefore do not see any risk in having account with ICICI Direct. However, you have to be careful of their expenses side. One of my major customer who has account with ICICI Bank (not ICICI DIrect which is a brokerage operation), where he used to park his securities or stocks (affiliated to NSDL), they charged him recently over Rs 750,000 towards expenses, He asked for details for over a month, and he is still not getting reply from them. Of course, his portfolio was over Rs 20 crores - but then reckless charges and non accountability is the feature of this lousy bank.
It is better you also search for another additional broker. One should have at least 2 or 3 brokers to do the transaction with, although only one Demat account is sufficient.
Indian systems are better placed than even Hong Kong. In Hong Kong, unless we chose to retain the securities with Government owned clearing house called CCAS which is similar to NSDL, but the procedure of depositing and withdrawing is not as easy as NSDL. If we keep the securities with the brokers, and if the broker fails, we in Hong Kong do not have any protection.
India in that respect way ahead of Hong Kong.
Kalidas, Hong Kong
22/9/2008
11)
for hembhat,'
Right and Wrong. Right - The primary lenders did get higher cash at the beginning of transaction and while issuing derivatives at the instance of Investment bankers. If they had stopped at that stage, they would have made money. However later on, they went on buying similar secondary derivatives issued by other bankers which had the potential to become ZERO if the concerned loans is defaulted, property seized and sold out in foreclosure. This is where they were caught. If they followed the principle that 'I made my money and let me run' they would not have suffered. They followed the principle ' I made huge money, so I am damn smart, so let me make 10 times what I made' This is where they lost even their underwear.
Sub Prime is made villain. The real cause is in derivatives based on Sub Prime. The primary lenders did not lose in sub prime very much. The property prices are down at the most 15% which has happened even in India and world over. There are no crisis there, because no derivatives were issued in India or elsewhere.
We have to wait for the full details of the plan. right now, the plan as it stands, has potential of turning $700 billion in big ZERO within 60 seconds.
Kalidas, Hong Kong
23/9/2008
Kalidas, Hong Kong
23/9/2008
12)
for Soumen,
Interesting. I did not investigate what you mentioned, but had some similar inner feeling that something was wrong.
It looks like the firms like Bear Sterns and Lehman Brothers were deliberately made bankrupt after transferring all bad assets (some of which you mentioned) by the banks like JPMC, CitiCorp and even Bank of America, so that their balance sheets were cleaned up and bankrupted firms will not have anything to pay the creditors.
Only other day, Financial Service Authority (FSA) in UK demanded Lehman Brothers to get back US$ 8 billions transferred to US Office only hours before declaring bankruptcy in London. The question arises, why did and where Lehman Brothers transferred the $ 8 Billions and what for? Did they buy Bad Assets from some other banks and paid them $ 8 billions in cash to cover up the losses at the original banks? There is a Criminal Conspiracy in what is going on at Lehman Brothers and Bear Stearns. How come that Lehman was allowed to fail and rest - Merrill and Morgan Stanley and goldman were allowed to survive by letting them merge with the banks or making them bank themselves. such plan did not become overnight. It was in the air for over months. If that was so, was it a game plan to let only Lehman go bankrupt and save the rest of three?
Kalidas, Hong Kong
23/9/2008
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.
5)
there are three kinds of investors Those
- who are afraid to lose money
- who are afraid to make money
- who are afraid to hold the money.
You are in last category. Buy altogether 5 stosks. I will tell you tomorrow the list
Kalidas, Hong Kong
10-10-2008
No comments:
Post a Comment