OptionPundit

Tag: MER

  • The Wall Street Bailout Plan- OP’s Perspective

    The $700billion market bail out plan is disclosed and is for review withCongress. The Target is to get it to President table by Friday, according to Forbes. As per the same article– Treasury Secretary Henry Paulson “is in effect becoming the dictator of the American financial system for a few months, subject to congressional oversight,” said Wall Street historian John Steele Gordon, author of a book about the national debt. They are seeking unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.

    I hope congress evaluates the plan going into deeper level of analysis so as to a) solve the crisis, b) Fix it for long term and c) consider the implication on average American. I hope they read the fine prints (If those were read earlier, the results wouldn’t have been so severe for the US economy). This massive bailout plan plus the past ones (~1 or more trillion dollars), almost of the size of entire Indian Economy (one of the pillars of BRIC) will be funded from the Taxpayer’s money primarily. So I sincerely hope that the guardians of world’s largest economy view this in all fairness to the small and medium and average American who had nothing to do with this mess but still need to pay for this clean-up (instead of letting these institution bear the sour fruits of their doings). US’s “Every Street” will now bailout “The Wall Street” ; and probably the guys who created the mess will still earn gazillions of $$$ in salary. If you would like to know more about this plan, read this straight forward explanation from New York Times. All eyes are upon US financial systems, how wizards solve this issue.

    Let’s come back to Markets-
    This was the largest two day rally since 1987 market crash. I think last week’s event provides a good story for a Hollywood movie that could be equally successful as “Wall street” if not better. On a bigger picture basis S&P 500 is almost flat as a week ago, as if nothing happened in a week that was full of pain, drama and a lot of emotional swings. So if we had such a huge rally, ideally I will be expecting huge volumes, IV crash especially for those financials. That should be the case. Really?

    • RVX, a measure of volatility on Russell 2000 index was in fact up in spite of a massive rally in the underlying.
    • VIX a measure of volatility on S&P500 was still above 30 and merely 3% down vs. a day ago.
    • Show me the volume- There wasn’t much of the volume in the financials in spite of huge surge (volume with respect to the down volumes we saw preceding few days). Goldman (GS), nearly half of the last two down days…AIG same; BAC, so so; Citibank (C), nearly 3/4; Morgan Stanley (MS), 1/3; Wachovia (WB), nearly 3/4; XLF, financial etf, half of the day before and lower than preceding 3 days; and IYF, DJ Financial Sector index, half of average of past few months and nearly 1/5th of the past few days.This is not what one would expect after such a massive “bail-out”….

    Further more, even though it was a huge up day, for NYSE- Up volume was still less than 90% (my gauge for trend strength) and on Nasdaq it was close to 80%. Technically, all the key indices Dow, S&500 and Nasdaq all closed below respective 50 days moving averages. A lot is going on in financial markets. Not an easy pill to swallow. Even if you are right, you are now not sure which rule will be changed next and you’ll lose your shirts in spite of being correct. A baffled market that it is.

    Trade extra carefully, Profitable trading, OP

  • More Pain Ahead

    This is one forecast I want to be wrong. I would like to be wrong as this doesn’t paint a good picture of broader economy. If general economy is bad, it’s tough time for everyone including me and I don’t want to forecast tough times. This post is available to only those who are blog members (blog registration is free).

    Here is how the chain started- First home prices’ bubble busted (still spiraling downward), two of the 4 solid wall street pillars who weathered big crises including the great depression, are now history, corporate profits are slowing, massive job cuts are being announced in “already tough” job market due to financial plus other lagging sectors and the stock market is sinking slowly which in turn will affect the consumer spending. That’s where my concern is. I gained more confidence in my hypothesis when I read similar views by respected Richard Russell of Dow Theory Letters.

    According to him –

    And I’m very much afraid that the next phase is going to be a pull back in spending, particularly discretionary spending, by the US public. Jobs will be difficult to find, the word will spread, if you’ve lost your job, you’re not going to find another one at the same level of pay (if you find one at all). This will have an impact on retail sales, and US imports (which will have international implications for the exports of foreign companies, remember, the US is buyer to the world). In this atmosphere, the big money, as I see it, will be made by wealthy speculators who will buy up foreclosed housings at bargain prices, often below the cost of replacement. Everything now depends on people being able to finance what they own, and this takes income and cash. The two rarest items around will be just that — cash and income. The great danger as I look ahead is that the bearish trends will feed on themselves. Frightened people dump their stocks for cash, the result is a sinking stock market. A sinking stock market further frightens people and pushes them to sell (“get me out at any cost”). When I tell people that the correct posture now should be cash and gold coins, they look at me as though I was crazy. That reaction makes me worry.

    There is shortage of funds, everyone knows it and that’s one of the reasons Lehman Brothers was allowed to fail because China and others probably signaled that they wouldn’t put up money so easily especially after having their hands burned. By the way I still don’t understand why Bank of America will pay such a huge premium for Merrill Lynch? A smart business person knew that after Lehman’s failure you could have easily picked-up Merrill Lynch even cheaper than it was trading for. I can’t seem to find an intelligent answer; probably I am too naïve and they are smarter that’s why I am writing a tiny blog and they are raking millions at these companies even though their shareholder’s value is eroding day by day. Another respected fellow blogger Jim of The Kingsland report has even tougher views on this transaction-

    We now despise Bank of America (BAC) following its purchase of greatly despised (by us) Merrill Lynch. They’re liars (not a revelation, I know). The new company would be a scam. On the conference call this morning BAC’s Lewis said they went through Merrill holdings “very carefully”. Huh? Later at the news conference Thain and Lewis said the “light bulb” moment flashed in their brains on Saturday to do a deal. Fascinating that BAC could go over Merrill so carefully in less than 24 hours!

    He goes on to share Goldman’s view:

    “Bank of America’s purchase of Merrill provides long term opportunity for accretion. That said the combined entity will be thin on capital as we estimate that pro-forma tangible common could fall to about 2.5%, while Tier 1 would be about 7.3%. This compares to a peer average of 4.2% tangible common and 8.5% Tier 1. On both metrics, pro-forma BAC would have the lowest ratio among peers. Moreover, while the deal may be accretive long term it also raises the cost of capital – consider BAC’s CDS spreads have widened and S&P has downgraded BAC senior debt. In addition, the need for a BAC shareholder vote presents risk to deal closing.”

    Moving forward, here is an important piece of news that I would like you to pay some attention (though it hardly got any attention from mainstream media). According to a report from China daily, “China, which holds a fifth of its currency reserves in Fannie Mae and Freddie Mac debt, may cut the portion held in US dollars”, according to China International Capital Corp (CICC), one of the nation’s biggest investment banks. China held $447.5 billion of US agency bonds as of June 2008, according to the CICC calculations using disclosures by the US Treasury. It is likely to reduce the portion of reserves in dollar assets from the current 60 percent by purchasing more non-dollar assets with new reserves, he said.

    There is just too much going on. If you are not sure making sense of what’s going on and can’t monitor the market close and can’t go trough the pains of losses, better stay out of the game. There will be lot of opportunities to make money again. Preserve your capital. Bear markets are not the easy ones to handle.
    As there is a saying-

    In bear markets, the winner is the one who loses the least.

    Monday was a tough day with huge volume. These days may very well be dead cat bounce along the downward move. But then again, these are hard times and 200-300points has no meaning. Markets can literally move on any “significant” news.

    Trade carefully, Trade Profitably, OP

  • Temasek Holdings, Who?

    Temasek holding delivers record profits S$ 18Billions (US$12.8 Billions @ 1U$=1.4 S$) for 2008. Who the heck this Temasek holding is? And why should you care about them? Alright, they are the largest shareholder of Merrill Lynch. They are powerful enough to negotiate with Merrill to recoup all their Merrill investment losses by halving their purchase price by obtaining additional shares. They have invested to into key blue chips of emerging markets. They are rich and have plenty of cash. They are one of the Singapore’s Sovereign Wealth Fund. Let’s review the highlights of the business results first, straight from their website–

    • Group net profit was a record S$18 billion, double the year before.
    • Total shareholder return (TSR) by market value for the year was 7% with lower marked-to-market gains due to market uncertainties at the March year end. (This was lower than their long term record)
    • TSR by shareholder funds was a solid 17%, reflecting strong operating performance of Temasek portfolio companies and realised gains from investment activities.
    • Net portfolio value grew 13% to S$185 billion, or 24% in USD terms to US$134 billion.
    • Temasek’s exposure to Singapore was stable at S$60 billion but this accounted for a smaller share of the portfolio – 33%, compared to 38% last year.
    • Investments post-2002, when the focus on Asia began, are now valued at S$77 billion, delivering a six-year compounded return of 32% per year compared to a six-year compounded return of 16% per year for the rest of the portfolio.
    • Investments in the financial services sector form the largest sector of the portfolio at 40%, with telecommunications and media being the second largest sectoral exposure at 24% of the portfolio (versus 38% and 23% respectively in financial year ended March 2007).
    • During financial year ended March 2008, Temasek made S$32 billion of new investments and monetised S$17 billion of its portfolio, compared with S$16 billion of new investments and S$5 billion of divestments the year before.
    • Volatility has increased substantially. Value-at-Risk has increased to S$40 billion on a portfolio of S$185 billion. This means a 16% probability of a value loss of over S$40 billion on a marked-to-market basis in the 12 months to March 2009.
    • Temasek’s support for the community is almost S$1 billion over the last decade with S$500 million of endowment to Temasek Trust. Among its principal beneficiaries, Temasek Foundation confirmed a commitment of S$16 million to fund 14 projects across Asia in its first year since its formation in May 2007.

    What are they saying?

    “We are concerned with the emerging risks of stagflation. This presents huge socio-political as well as economic risks in the next 3-5years. Opportunities may be limited in such a scenario”.

    When someone like Temasek is saying something, it’s time we pay attention to the direction they are pointing to.
    Why should you know about them? I think it’s important to know how “Big Boys” do their portfolio allocation. I shall encourage my readers to download and read the full report. It’s full of valuable insights. Here is the link to download the report. A full 40% is invested into financial services, followed by 24% into telecom and communication. But before you think they are way too overexposed to finacials, you may want to look at the companies that they have invested in. I am sure you may rethink your opinion about them.

    Have fun exploring annual report of one of the most respected and vibrant Soverign Wealth Fund (SWF).

    Profitable trading, OP