Baltic Dry Index Continues To Plunge

And the Baltic Dry Index plunged another 6% or 242 points.

Do see yesterday's posting Baltic Dry Index Keeps On Plunging!!

On purchasing.com Dry bulk ocean freight rates tank on credit concerns

• Credit crunch partly to blame for massive nosedive in freight rate index
  By Dave Hannon -- Purchasing, 9/29/2008 1:28:00 PM
  
  “The demand for goods is there; there is just not enough liquidity to move those goods around.”
  
  The words of Stamatis Molaris, CEO of Excel Maritime in a Reuters interview on Friday have an eerie ring to them—eerie in the sense that we may be hearing a lot more of them from executives up and down the supply chain. Speaking on a day when the Baltic Dry Index plunged to a two-year low, Molaris said tight credit conditions would slow orders for materials that require massive ships as well as the ability to build those ships.
  
  “If the credit crunch lasts beyond the short term, then shipyards—especially the newer ones—are going to fall like a house of cards,” he told Reuters, adding that even Excel with its strong balance sheet may find it hard to raise funds for new acquisitions in the current environment. "Get me funding and I'll look at a ship. I cannot stress this enough: The banks are not lending any money."
  
  The Baltic Dry Index, which measures drybulk shipping rates on 40 routes across the world, fell 417 points Friday to close at 3,746 and by the end of the day Monday it was down to 3,504.
  
  Similarly, Norden CEO Carsten Mortensen also blamed the credit crunch for the freight rate plunge. He told Lloyd’s List that “A very dramatic two months in the banking sector have pushed down rates and sentiment much more than most market participants had expected. Does that change our fundamental belief in the demand for dry cargo bulk transportation going forward? Not really.”
  
  Even the Wall Street Journal referred to the Baltic Dry Index plunge as “ripple effects of the crisis in the real economy."
  
  But other sources say it’s not just the credit markets at play and there are real changes afoot in demand trends for ocean shipping. Jeffrey Landsberg, a freight options broker at Imarex, told Forbes that reports out of China that it will boycott iron ore from Brazil and use domestic iron ore put dry bulk shipping firms and rates into a panic. Forbes points out that Vale said the news was untrue, but the damage was done to the index notwithstanding.
  
  But Landsberg also agreed that tight credit markets would hinder shipbuilding, citing three separate South Korean shipyards that announced they would likely have to cancel 40 big ships because they aren’t able to raise enough capital to finance construction.

On the Financial Times. Jumping ship

• Jumping ship
  Published: September 29 2008 03:00 Last updated: September 29 2008 03:00
  
  Yet more reason to panic? The Baltic Dry index, which measures dry bulk shipping costs, plunged by nearly a quarter last week - 10 per cent on Friday alone - as rates plummeted for the biggest ocean carriers of raw materials. Shipping groups' shares, notably in Asia, have followed suit. Given the index's reputation as a leading indicator, that looks scary. In fact, the index's predictive value has weakened as it has become far more volatile than the commodities markets underlying it, gyrating around on factors such as shipping supply bottlenecks. It has twice doubled and fallen back within 15 months; its latest slide leaves it 70 per cent below its May peak.
  
  The Baltic Dry once correlated closely with global commodity indices. It started yoyoing in 2002 as China became a vast suction pump for materials such as iron ore and coking coal, straining the global supply chain. And China is driving today's plunge. The expected post-Olympic rebound - as polluting plants shuttered during the Beijing games reopened - has not occurred, with steel producers jittery over demand. They have also suspended buying iron ore from Brazil's Vale in protest over cheeky demands by the world's largest producer for a mid-contract price increase. With China's ore stockpiles overflowing, ships are sailing empty from Brazil. Another pressure on the index may be sell-offs of forward freight agreements, or options contracts on freight rates, as finance houses dump derivatives.
  
  But while its movements may be exaggerated, the Baltic Dry's drop does reflect a weakening of Chinese raw material demand. Meanwhile, Drewry, the London-based shipping consultants, forecasts growth in container ship imports from Asia to Europe will fall from 15 per cent in recent years to 4-5 per cent this year while container imports from Asia to the US will decline 2 per cent. Just as money is no longer rocketing round the financial system, so goods flowing round the world's seaways are slowing too.

However, there are some who remains optimistic. Analyst sees shipping demand rebounding this year

• NEW YORK - One analyst suggests that the spreading credit crisis and the lifting of some temporary factors will allow drybulk shipping demand to rebound by the end of this year.
  
  Shipping activity slowed significantly, as anticipated, around the Olympics in Beijing. But demand did not rebound this month as was widely expected, Jefferies analyst Douglas Mavrinac said, because of a Chinese boycott of Brazilian iron ore.
  
  Last week, an association representing the largest Chinese iron ore suppliers formalized a boycott against a major Brazilian supplier, as that company announced plans to hike prices to Asian customers by about 11 percent.
  
  Mavrinac said he expects iron ore deliveries from Brazil to China will remain "limited" in the near future, but will need to increase as China runs of its own supplies of the commodity, used to make steel.
  
  Until then, drybulk stocks and the heavily watched Baltic Dry Index will likely fall further, he said.
  
  But possibly by as early as November, Mavrinac said the boycott should be lifted and drybulk trade - which also includes shipments of grain, coal and cement - should pick up.
  
  The analyst even predicts that the Baltic Dry Index, which measures drybulk shipping rates on 40 routes across the world, might return to record levels it set in May.
  
  The index, managed by the Baltic Exchange in London, closed down 242 points Monday at 3,504. It has declined since hitting an all-time high on May 20 of 11,793.
  
  And Mavrinac said that shipping demand and the potential jump in drybulk stocks will likely grow even stronger as the credit crisis spreads. The analyst notes that shaky financial markets are making it difficult for shipowners to finance the building of new ships, so the 2010-influx that was expected will likely be limited, keeping demand high.
  
  Most drybulk stocks sank by double-digit percentages and set fresh year-lows Monday, as the U.S. House of Representatives failed to pass the $700 emergency bailout package designed to ease quickly spreading financial woes.

Other postings:

1. Views On Current Weakness On Baltic Dry Index

2. The Collapse of the Baltic Dry Index

3. Goldman Downgrades Bulk Shippers!

4. Baltic Dry Index Keeps Falling!

5. Baltic Dry Index Stages Strong Rebound!

6. Baltic Dry Index Set For Strong Recovery???

7. Baltic Dry Index Plunges To Seven Month Lows!

8. The Baltic Dry Index Keeps On Plunging!

Dow Plunges!

Yes stocks were hit bad as approximately $1.2 trillion in market value is gone after the House rejects the $700 billion bank bailout plan.

CBS Marketwatch reported the following. House rejects financial-rescue package

• The House on Monday voted down the Bush administration's historic $700 billion financial rescue plan, triggering one of the worst days for stocks and dealing a sharp blow to bipartisan efforts, despite repeated warnings about the U.S. teetering on the brink of an economic precipice.
  
  A clearly disappointed Treasury Secretary Henry Paulson blasted another dire warning Monday afternoon about stressed world markets reducing credit availability -- a threat to American jobs and livelihood.
  
  "This is much too important to simply let fail," Paulson said.
  
  Officials are trying to figure out what the next step will be for rescue-related legislation, and an aide in the House speaker's office said lawmakers are ready to work in a bipartisan way. U.S. stocks plunged when the vote results became clear, and the Dow Jones Industrial Average ended down 777 points, or 7%, to 10,365.
  
  Finger pointing followed soon after the vote. Republican leaders accused House Speaker Nancy Pelosi of driving away some GOP votes with a partisan floor speech. Rep. Barney Frank, chairman of the financial services committee, said Republicans may be "covering up the embarrassment" of not having the votes.
  
  "And because somebody hurt their feelings they decide to punish the country," Frank said. "I mean, I would not have imputed that degree of pettiness and hypersensitivity."
  
  Pelosi said bipartisan needs to move legislation forward: "The crisis has not gone away."
  
  Some House members balked at giving the Treasury immense power -- the ability to buy up hundreds of billions of bad debt. And there were ongoing complaints over insufficient accountability, transparency and large-scale government intervention. But Paulson, along with Federal Reserve Chairman Ben Bernanke, has been intent over the past week on broadcasting warnings about dire consequences if the plan was even delayed.
  
  With elections approaching, lawmakers, both Democrats and Republicans, are under intense scrutiny, and nervous about voting for a plan that risks so much taxpayer money without any definitive promise of success. In the end, there were 205 in favor of the legislation and 228 against. Among Democrats, 140 voted in favor and 95 against. Among Republicans, 65 voted in favor and 133 against.
  
  Critics also say the plan inadequately addressed job losses and a distressed housing market --problems that underlie current economic weakness. Meanwhile, those in favor of the plan were looking to treat a manageable symptom -- the frozen credit market -- if not the actual disease.
  
  A vote in the Senate was expected Wednesday, and the president would have followed with a speedy signature.

Many thanks to Trader Mike for putting the plunge into perspective. The Worst One-Day Percentage Losses for the Dow, S&P 500 and Nasdaq »

• Today was the third worst one-day decline for the Nasdaq. Here are the 10 worst percentage losses for the Nasdaq:
  
  October 19, 1987: -11.35%
  April 14, 2000: -9.67%
  September 29, 2008: -9.14%
  October 26, 1987: -9.01%
  October 20, 1987: -9.00%
  August 31, 1998: -8.56%
  April 3, 2000: -7.64%
  January 2, 2001: -7.23%
  October 27, 1997: -7.16%
  December 20, 2000: -7.12%
  
  The S&P 500 had its second worst day since 1950. (The data’s from Yahoo Finance and only goes back to 1950. The S&P 500 index was created in 1957, but it has been extrapolated back in time.) Here are the 10 worst one-day percentage losses for the S&P 500::
  
  October 19, 1987: -20.47%
  September 29, 2008: -8.79%
  October 26, 1987: -8.28%
  October 27, 1997: -6.87%
  August 31, 1998: -6.80%
  January 8, 1988: -6.77%
  May 28, 1962: -6.68%
  September 26, 1955: -6.62%
  October 13, 1989: -6.12%
  April 14, 2000: -5.83%
  
  There are a lot of October & September dates in that list!
  And finally the Dow. I’m not sure where today’s drop ranks but it’s not in the top 5 (via Dave Manuel).
  
  October 19, 1987: -22.61%
  October 28, 1929: -12.82%
  October 29, 1929: -11.73%
  November 6, 1929: -9.92%
  December 18, 1899: -8.72%
  
  From the data I pulled from Yahoo Finance, which only goes back to 1928, today was the 17th worst day since 1928.. It was the fourth worst in modern times — which is probably a better measure given how different the world is now. Given all the circuit breakers put in post the 1987 and 1989 “market breaks” it would be real difficult (if not impossible) to get another 22% down day. Here’s the modern top five worst Dow days:
  
  October 19, 1987: -22.61%
  October 26, 1987: -8.04%
  October 27, 1997: -7.18%
  September 17, 2001: -7.13%
  September 29, 2008: -6.98%

And on the NY Times, warnings are out that this financial crisis could spread worldwide! Financial Chill May Hit Developing Countries

• September 26, 2008
  Financial Chill May Hit Developing Countries
  By MARK LANDLER
  
  WASHINGTON — As Europe and Asia play down the need for an American-style bailout for their banks, the crisis may threaten a different class of countries: those in Eastern Europe, Latin America and Africa that depend on foreign capital and shoulder American-style trade deficits.
  
  Alarmed by the threat, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, is calling for a multilateral consultation — involving the United States, Europe, China and other financial powers — to develop a coordinated response to the crisis.
  
  “We’re facing a systemic crisis, and it needs a systemic response,” Mr. Strauss-Kahn said in an interview on Wednesday. “The I.M.F. is the right place to organize a global response to weaknesses in the global financial system.”
  
  His initiative is an attempt to thrust the fund back into the thick of world events — a role it played in previous financial crises in Asia, Russia and Latin America, but has not played in the current turmoil.
  
  Whether or not he succeeds, economists agree that Mr. Strauss-Kahn, a former French finance minister, has identified a risk. The crisis, by squeezing the flow of capital, threatens countries from the Baltic to Africa that depend on foreign money to finance their deficits.
  
  “There are a number of countries where you can get quite worried if capital flows stop,” said Thomas Mayer, the chief European economist at Deutsche Bank in London. “When you look at their high current-account deficits, Central and Eastern Europe seem particularly vulnerable.”
  
  A second category of countries are those who export oil or other commodities, and are vulnerable to a decline in prices — something that economists said would happen if the crisis hobbled growth. Oil plunged last week as Wall Street teetered, but it bounced back as hope rose for a bailout.
  
  “If the world economy does experience something like a global recession next year, those countries will be at risk,” said Michael Mussa, a senior fellow at the Peterson Institute for International Economics.
  
  There are more than 20 countries with current-account deficits that exceed 5 percent of their economic output, Mr. Strauss-Kahn said, putting them in what the fund considers the endangered category.
  
  Mr. Strauss-Kahn declined to name names, but outside economists listed Bulgaria, Estonia, Romania and Turkey as among the red flags in Europe. In Africa, they said, South Africa and Nigeria were worrisome; and in Latin America, Venezuela and Ecuador.
  
  The list, Mr. Strauss-Kahn said, does not include the four largest emerging-market countries — China, Russia, Brazil and India — which are running healthy trade surpluses or have hundreds of billions in foreign exchange reserves, though Russia is vulnerable to a drop in oil prices.
  
  Western Europe, economists say, is unlikely to be seriously affected, despite having banks that hold mortgage-related assets. This has made European officials reluctant to heed the Treasury Department’s call for them to undertake their own efforts to bolster the financial system.
  
  Treasury Secretary Henry M. Paulson Jr. has resisted efforts by Congress to make foreign banks ineligible for the plan. But administration officials said they planned to set priorities on which ones to help, based on whether their governments were willing to help with the cleanup process.
  
  Two of the most threatened countries lie on Europe’s eastern frontier: Bulgaria and Romania, which have racked up high current account deficits and are running overheated economies.
  
  “These countries have been growing too fast or borrowing too much,” said Peter Akos Bod, a former president of the Hungarian central bank. “Should there be a sudden stop in capital, they would be in deep trouble.”
  
  Latin America is a perennial source of worry, given its history of troubled fiscal policy. For the moment, several countries, notably Venezuela, are benefiting from the soaring price of oil.
  
  But if oil and other commodities were to decline, said John Williamson, a senior fellow at the Peterson Institute who specializes in the region, “South America would be less comfortably placed.”
  
  Mr. Strauss-Kahn said he recognized that the monetary fund would be largely a bystander in this crisis, given that the problems began in the United States and remain largely a domestic banking issue.
  
  But he said the fund could play a role in giving advice. Among its suggestions: rather than buy distressed mortgage-related securities from banks, the Treasury should swap them for bonds, which Mr. Strauss-Kahn said would be cheaper and leave some of the risk with the banks.
  
  Mr. Strauss-Kahn said he also planned to confront one of the most politically charged issues at the fund: strengthening its pressure on China to allow its currency, the renminbi, to rise.
  
  Critics in the Bush administration and Congress say the fund has not pushed China hard enough on its currency. Mr. Strauss-Kahn acknowledged the difficulty of being tougher, given the politics of the fund.
  
  The fund’s last multilateral consultation, to discuss global imbalances, was held in 2006. It included China, Japan, the European Union, Saudi Arabia, and the United States. Mr. Strauss-Kahn did not say which countries would be invited to take part this time, though other officials said it would probably include those countries and emerging markets like Brazil and Russia.

Baltic Dry Index Keeps On Plunging!!

Previous blogged on the Baltic Dry Index.

1. Views On Current Weakness On Baltic Dry Index
2. The Collapse of the Baltic Dry Index
3. Goldman Downgrades Bulk Shippers!
4. Baltic Dry Index Keeps Falling!
5. Baltic Dry Index Stages Strong Rebound!
6. Baltic Dry Index Set For Strong Recovery???
7. Baltic Dry Index Plunges To Seven Month Lows!
8. The Baltic Dry Index Keeps On Plunging!

Here's yet another update on the Baltic Dry Index.

The Index had yet another horror story last Friday plunging another 10% pr 417 points.

Index is now at 3746!

And with such a plunge, shipping stocks across Asia fell too!

• Sept. 29 (Bloomberg) -- Mitsui O.S.K. Lines Ltd., Japan's largest operator of iron-ore ships, dropped in Tokyo trading along with domestic rivals, as rates for carrying commodities had their biggest slump on record.
  
  The shipping line declined as much as 4.8 percent to 901 yen and traded at 909 yen as of 9:17 a.m. in Tokyo. Nippon Yusen K.K., Japan's biggest shipping line by sales, dropped as much as 3.8 percent and Kawasaki Kisen Kaisha Ltd., the third-largest, slid as much as 4.8 percent.
  
  The Baltic Dry Index, a measure of commodity-shipping rates, dropped 10 percent on Sept. 26, as Chinese steelmakers stopped buying iron-ore from Brazil's Cia. Vale do Rio Doce as part of a pricing standoff. The index has tumbled 80 percent since a peak in June.
  
  ``There's no strength left to even muster a rebound,'' said Yoshihisa Miyamoto, an analyst in Tokyo at Okasan Securities Co. ``This week shipping lines are set for a punch that will put to rest anyone left that wants to buy.''
  
  Chinese steelmakers, the world's biggest iron-ore consumers, won't buy from Vale in the ``short term,'' the China Iron and Steel Association said Sept. 26. Vale wants to raise prices for Asian mills to match what European clients are paying. The association says that's ``unreasonable'' because of slowing steel demand from automakers and builders.

Some noteworthy points.

1. Index has plunged 80% since its peak in June!!!

2. Slowing steel demands!

And yes many are seeing their investments plunged due to their investments in shipping stocks.

Makes one wonder.

Is investing to be blamed or should one be realistic enough to understand that perhaps they did not understand the nature of business or the business economics of the business they had invested in?

And of course, some are still holding on to their investments, refusing to accept what has happened. Some call it being in denial mode. I wonder if they realise that there is a probability that perhaps this shipping index would never reach anyway near its peak again. A probability but on the other hand, who am I to say, it would never?

Dr. Marc Faber: Looks Like We Are In A Financial Crisis

Just in.. “Looks like we’re in a financial crisis,” says Marc Faber

• Speaking at the CLSA conference in Hong Kong, bearish Dr Marc Faber refrains from saying ‘I told you so’, and remains pessimistic about the global outlook for markets and economies.
  
  “The severity of a downturn is proportional to the excesses that preceded it,” began Marc Faber, leading off his speech to the CLSA conference in Hong Kong.
  
  He then pointed out those excesses, with the chief culprit in his opinion being the mistake of leaving the US federal funds rate at 1% until June 2004, three years after the US economic expansion began. That has led to a mis-pricing of capital and overly strong debt growth with a consequent diminishing of asset quality in financial institutions. Today, US debt-to-GDP levels are higher than they were in the days preceding the Wall Street crash of 1929.
  
  Even though one solution would be to adopt tighter monetary conditions, Faber believes that such a move would be contrary to the US government philosophy that overlooks asset bubbles – and when these asset bubbles deflate, they flood the market with liquidity. “Central bankers have become hostages to inflated asset markets,” he points out. He notes that virtually every asset class from commodities to collectables has witnessed a price boom in recent years.
  
  In turn those bubbles are now popping. It started with property, then subprime, then financial institutions. Next to go will be equities as problems hit the wider economy, first in America, and then, given that market decoupling has not occurred, worldwide. “Sell those left standing,” he recommends, “while their valuations are still in the sky.”
  
  While Faber sees some potential for short-term strength for the US dollar, ultimately he feels the dollar is a worthless currency, and the only way that the US indices can return to previous highs is by the dollar being diluted by inflation.
  
  “The financial sector will never again see the conditions of the last 25 years, and the S&P index won’t make a new high in real terms for the next 20 years, “ he observes. “Indexing is dead and you can only make money on stocks with a trading mentality and by stock selection.”
  
  Faber is not a fan of the US bailout package, and suspects that the US government is overzealous in its interventions, with Hank Paulson coincidentally synchronising his interventions to time with falls in the Goldman Sachs stock price. “If the government buys everything, then hedge funds can simply arbitrage by buying all the rubbish and selling it to the Fed.”
  
  After his speech was concluded he said that the US cannot stomach asset prices falling to their natural level and a better use of the American bailout package would be to take over the banks and recapitalise them, or to use the money to buy up the surfeit of American homes; if people didn’t want to sell them for fear of reducing home prices, simply demolish them.
  
  Furthermore, although he acknowledges the possibility that the US bailout might serve to prevent US property prices falling much further, he thinks that this stability would be married with no real prospect for price increases and therefore long-term price stagnation in real terms.
  
  His investment solutions remain unchanged from his customary message, namely: farmland and commodities. On the equities side, he sees potential for Japan to outperform, with Japanese financial institutions looking interesting.

How?

Dr. Faber also appeared on CNBC. http://www.cnbc.com/id/26895741

• $700 billion may not be enough to bail out Wall Street says one analyst, given the lack of transparency and the length and breadth of financial markets involved.
  
  Marc Faber, editor & publisher of 'The Gloom, Boom & Doom Report', told CNBC's Asia Squawk Box on Friday, he doubts that $700 billion would make any difference when you consider the size of U.S. credit markets.
  
  "Looking at the size of the credit market in the United States, the equities market, the housing market and then looking at the size of the credit default swap market, which is around $62 trillion now, and the world wide derivatives market which is now $1,300 trillion dollars, I very much doubt that $700 billion would make any difference at all. In fact, I think it's a bad proposal in the sense that it will distort market pricing," Faber said.
  
  Faber says that the fundamental problem is not falling home prices as U.S. Treasury Secretary Henry Paulson suggests.
  
  "The problem is that too much money was lent against homes at inflated asset values. In other words that means at the peak of the market, people went and lent them 120 percent against the value of the home. And that is the problem -- the leverage in the system," Faber said.
  
  He added that the current bailout plan proposed by the Treasury and the U.S. Federal Reserve does not address this leverage problem in the markets.
  
  "My friend suggested what would be much cheaper -- go in and buy a million homes in the United States and burn them down. Because that will reduce the supply. Of course it is an economic nonsense solution, but it is as good as the Treasury's proposal," Faber quipped.
  

There's this comment on FinancialSense market wrap today.

• Housing, jobs, and durable goods were all disasters. Expect to see production cutbacks and rising unemployment. Anyone who thinks the US is not in recession is in absolute fantasyland. - Mike 'Mish' Shedlock ( see Horrid Data: Housing, Jobs, Durable Goods )
  

Update on Gamuda's Current Receivables Issue

Here's an update to the blog posting Gamuda's Current Receivables Issue

The below is screen shot of what I wrote back then.

Gamuda reported its earnings the other day.

The receivables issues highlighted earlier has increased!

The receivables amount is now 1.319 billion versus 1.012 billion 3 months ago!

Sweet holy cow!

What's happening here?

What exactly are these receivables and why is it ballooning at such an incredible pace?

Do you reckon that there is a massive problem here?

Warren Buffet Talks About Goldman Sachs Investment: Transcript of CNBC Interview

The transcript of the interview between Warren Buffett and CNBC in regards to Berkshire investment in Goldman Sachs comes in 3 parts.

1. http://www.cnbc.com/id/26867866
2. http://www.cnbc.com/id/26869518
3. http://www.cnbc.com/id/26871327

Here are some of the interesting points.

• BECKY QUICK: We know you get all kinds of deals, all kinds of people who come knocking asking you to jump in. You've said no to everything to this point. Why is this the right deal at the right time?
  
  WARREN BUFFETT: Well, I can't tell you it's exactly the right time. I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet of them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check.

And this was rather interesting in my opinion.

• BECKY: Does the backdrop of the Federal government potentially getting involved with a massive bailout plan for Wall Street, does that have anything to do with this deal?
  
  BUFFETT: Well, I would say this. If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.

WOW! Firstly this is a huge endorsement on what Paulson wants to do. Secondly, Buffett is clearly stating how critical things are at this moment of time.

• BECKY: Why would that be a mistake? Because the institutions would collapse, or because you could get a better price?
  
  BUFFETT: Well, there's just no telling what would happen. Last week we were at the brink of something that would have made anything that's happened in financial history look pale. We were very, very close to a system that was totally dysfunctional and would have not only gummed up the financial markets, but gummed up the economy in a way that would take us years and years to repair. We've got enough problems to deal with anyway. I'm not saying the Paulson plan eliminates those problems. But it was absolutely, and is absolutely necessary, in my view, to really avoid going over the precipice.

Buffett then continues..

• BUFFETT: Yeah, well, both the economy and the financial markets, but there're so intertwined that what happens, they're joined at the hip. And it doesn't pay to get into horror stories in terms of naming institutions or anything. But I will tell you that the market could not have, in my view, could not have taken another week like what was developing last week. And setting forth the Paulson plan, it was the last thing, I think, that Hank Paulson wanted to do. there's no Plan B for this.

Ahem! We were that close.... !!!

• BECKY: Warren, you mentioned that Wall Street could not have taken another week like that. But what does that mean to the American taxpayer who's sitting at home saying, 'Why is this my problem?'
  
  BUFFETT: Yeah, well, it's everybody's problem. Unfortunately, the economy is a little like a bathtub. You can't have cold water in the front and hot water in the back. And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business. Look, right now business is having trouble throughout the economy. But a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry and retail and everything else to grind to something close to a halt. It was, and still is, a very, very dangerous situation. No plan is going to be perfect, but thanks heavens that Paulson had the imagination to step up with something that is of the scope that can really do something about it. And what he did with the money market funds, that was not an idea that I had, but as soon as I heard about it, that was an important stroke. Because the money, pulling out of the money market funds and going to Treasuries, and driving Treasury yields down to zero. That -- a few more days of that and people would have been reading about lots and lots of troubles.
  
  JOE: But when the more dire it looked, in terms of communicating, with some of these Senators, the three-month or one-month bill, again, started acting similar to what was happening on Thursday. Now we averted that disaster on Thursday, but it's already been three or four days. It's almost as if these guys already forgot about the position that we were in. Do you think that accounted -- we're still susceptible to that happening again if it looked like they're not going to go through with this?
  
  BUFFETT: No, it would get worse. Last week will look like Nirvana (laughs) if they don't do something. I think they will. I understand where they're very mad about what's happened in the past, but this isn't the time to vent your spleen about that. This is the time to do something that gets this country back on the right track. What you have, Joe, you have all the major institutions in the world trying to deleverage. And we want them to deleverage, but they're trying to deleverage at the same time. Well, if huge institutions are trying to deleverage, you need someone in the world that's willing to leverage up. And there's no one that can leverage up except the United States government. And what they're talking about is leveraging up to the tune of 700 billion, to in effect, offset the deleveraging that's going on through all the financial institutions. And I might add, if they do it right, and I think they will do it reasonably right, they won't do it perfectly right, I think they'll make a lot of money. Because if they don't -- they shouldn't buy these debt instruments at what the institutions paid. They shouldn't buy them at what they're carrying, what the carrying value is, necessarily. They should buy them at the kind of prices that are available in the market. People who are buying these instruments in the market are expecting to make 15 to 20 percent on those instruments. If the government makes anything over its cost of borrowing, this deal will come out with a profit. And I would bet it will come out with a profit, actually.

Do read the rest of the transcripts. Here are the links again.

1. http://www.cnbc.com/id/26867866

2. http://www.cnbc.com/id/26869518

3. http://www.cnbc.com/id/26871327

Why Such Poor Reporting?

Posted on Star Business: Sapura Resources returns to black in first quarter

• KUALA LUMPUR: Sapura Resources Bhd posted a pre-tax profit of RM478,000 in the first quarter ended July 31, 2008 compared with a pre-tax loss of RM1.73mil in the previous corresponding period.
  
  The company’s revenue increased to RM60mil from RM55.4mil previously. - Bernama

Ok Star Business is only re-broadcasting what Bernama wrote.

As one can read, this news brief talks only on Sapura pre-tax profit.

And in the financial world, such reporting makes no sense because one needs to address corporate taxes too.

So what's the point of publishing how much pre-tax profits Sapura Resources made?

And if you include in the corporate taxes, Sapura Resources lost money.

Here is the link to Sapura Resources said earnings report.
Quarterly rpt on consolidated results for the financial period ended 31/7/2008

And it's rather amazing because the Edge has managed to report it correctly.

24-09-2008: Sapura Resources’ 2Q loss narrows

• KUALA LUMPUR: Sapura Resources Bhd’s net loss for the second quarter (2Q) ended July 31, 2008 narrowed to RM753,000 from to RM1.73 million a year earlier due to more vehicles sold and a rise in the number of students in its education business.
  
  Revenue rose 8.4% to RM60 million from RM55.36 million a year earlier. No dividend was declared.
  
  For the six months to July 31, its net loss narrowed to RM2.07 million from RM4.94 million a year earlier, while revenue rose 37% to RM124.99 million from RM91.26 million.

Can we hope for better financial reporting?

Massive Redemptions At Hedge Funds!

This is massive!

Published on the UK Independent.

• By Nick Clark
  Tuesday, 23 September 2008
  
  Hedge funds could have an unprecedented level of cash pulled out by investors this quarter, according to insiders, just as they faced millions of pounds of losses from last week's shock regulation of short selling. It has been a tough year for the industry with high-profile funds blowing up, clients increasing redemptions, as well as public fury over short selling and increased threats of regulation.
  
  One hedge fund expert pointed to The Hedge Fund Implode-O-Meter (HFI) as how he judges the state of the industry. The HFI was set up online in the wake of the credit crunch "to track as hedge funds learn the double-edged-sword nature of the often extreme leverage they use".
  
  The group's "imploded funds" list has hit 51 companies since the sub-prime mortgage crisis in the United States kicked off a widespread downturn. That compares with its historical list, stretching back more than a decade to the end of 2006, of just 14, including the collapse of Long-Term Capital Management and Amaranth.
  
  This year, big names including Peloton Capital Partners, Carlyle Capital Corporation and Dillon Read Capital Management are just some of the half century to collapse. "We think hedge funds have largely lost their way," HFI said. "Notably, most have abandoned capital-preservation for the goal of aggressive accumulation of capital gains, with the benefit of lax regulation and extreme leverage available to exploit."
  
  It has 34 stocks on its "ailing/watch list" of those that have suffered significant value declines or temporarily halted redemptions. According to EuroHedge, a hedge fund data provider, 272 individual funds strategies were launched during the first six months of 2008, the lowest for nine years. In the same time, 243 funds have been liquidated, the highest in a six-month period.
  
  Nouriel Roubini, the New York University economics professor, says worse is to come. He believes there will be an increase in client withdrawals and a shake-up of how funds are regulated.
  
  The redemptions seem to have started in earnest, although currently the evidence is mainly anecdotal. One UK hedge fund manager confided that last week had the highest number of investors rushing to withdraw funds that he has known. The industry will know for sure whether it is a drip or a deluge when the data providers release their statistics for the third quarter, next month. One market analyst said: "I know even the good hedge funds have been suffering withdrawals recently. Investors are very nervous."
  
  Performance numbers are also under pressure. Some have done well out of the market disturbance, but on average the performance numbers are at a low ebb. Andrew Baker, the deputy head of Aima, the hedge fund trade body, said: "The performance is undoubtedly soggy. There are not many strategies that stand out."
  
  EuroHedge revealed that strategies that have done particularly badly this year include several run by Naissance Capital, once bankrolled by the Habsburg families, which are down a fifth and Pico Fund, which is down 32 per cent. At Endeavour Fund, set up by former Salomon Smith Barney traders, the second fund has fallen by 40 per cent, while its third fund is down 38.79 per cent in 2008. In the emerging markets, PharmaInvest Fund's investments in emerging markets are 38.16 per cent down.
  
  Other funds have sought to lock in investors by halting redemptions. The latest example was RAB, with its flagship Special Situations Fund, as it was so desperate to prevent exits after a 22 per cent drop in performance that it offered vastly reduced fees in return for a lock-in period of three years.
  
  One of the main problems experienced by hedge funds is the extent of leverage in the industry. The funds were able to take on huge amounts of debt, with little capital needed as security, to boost returns. One observer said some of the leveraged strategies were like "picking up pennies in front of a steamroller, and that only takes a turn in the market to cause severe problems".
  
  Andrew Lodge, the managing director of fund of hedge funds Nedbank Investments, said: "Some funds have gone in for huge leverage-driven strategies, which can be a problem. The appetite for leverage is less." He added that some could be affected by increased margin calls, and could face issues over their covenants.
  
  At the same time, hedge funds, like the banks, have had to write down exposures to investments in risky instruments including collateralised debt obligations and asset backed securities, and also been exposed to the huge swings in the market.
  
  Another issue is the regulators sniffing around. There have been wider calls for transparency and official controls of the industry, which has already been stung by the shock short-selling rules.
  
  Mr Lodge said: "It's a myth to say hedge funds aren't regulated. There is a perception that they are running wild with no oversight, which isn't true. We would welcome some regulation, just as long as it doesn't strangle the industry."
  
  On Friday, the FSA banned short selling in financial stocks, and forced hedge funds to disclose their positions. As the underlying shares rose as a result, the industry was looking at well over £1bn in paper losses on the day.
  
  Stuart McLaren, financial services partner at Deloitte, said: "When the dust has settled, I expect the regulators to look at the role that hedge funds have played in the current issues. I expect there will be increased calls for regulation, but I doubt much will come from it."
  
  Mr Baker said: "Some hedge funds are doing well. However, the number of professionals feeling good about life will be dwindling. The health indicators are generally negative, while costs are up and performance is down. Many are feeling battered and bruised and feeling worried about the future."

Source: http://www.independent.co.uk/news/business/news/hedge-funds-suffer-mass-redemptions-938959.html

Warren Buffett Gives Goldman Sachs A Vote Of Confidence!

Yes the unthinkable has happened!.

Berkshire Hathaway has invested some $5 Billion into Goldman Sachs!

As reported in CNN

• Goldman (GS, Fortune 500) will sell $5 billion of preferred stock to the insurance and investment giant, which will also receive warrants to purchase $5 billion of common stock with a strike price of $115 per share, the company announced Tuesday. Berkshire (BRKA, Fortune 500) has five years to exercise the warrants.

And here is what Warren has to say.

• "Goldman Sachs is an exceptional institution," said Buffett in a statement. "It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance."

Of course the folks at Goldman Sachs are extremely happy.

• "This investment will further bolster or strong capitalization and liquidity position," said Lloyd Blankfein, Goldman's chief executive

And needless to say the market is reacting well to this news.

• "It's a vote of confidence in Goldman," said Nancy A. Bush, founder of NAB Research. "I can't imagine something better than the good housekeeping seal of approval."

Over at CNBC. http://www.cnbc.com/id/26858974

• Shares of Goldman soared over 11 percent in after-hours trading following the announcement. US stock futures also jumped on the news.
• This is a marriage of two incredibly intelligent, attractive partners," said Michael Holland, a money manager at Holland in New York. "Buffett is saying about the top management of Goldman Sachs that they're distinct and different from their competitors—and it's a vote of confidence which is gold plated. You don't get better than this."
• The investment is Buffett's second major purchase in less than a week. Thursday, his MidAmerican Energy Holdings affiliate agreed to buy power supplier Constellation Energy Group for $4.7 billion.

And on another article, written by Alex Crippen on CNBC: Warren Buffett Gives Goldman Sachs a Surprise $5B Vote of Confidence

• In a surprise return to Wall Street, Warren Buffett's Berkshire Hathaway has a deal to invest at least $5 billion in Goldman Sachs.
  
  Up until now, he has rejected all pleas to come to Wall Street's aid during the current crisis.
  
  Goldman revealed the vote of confidence from the man generally considered the world's greatest investor late this afternoon in a news release.
  
  Berkshire will buy $5 in preferred Goldman stock with a dividend of 10 percent. It will also get warrants to buy another $5 in common stock over five years.
  
  Buffett has avoided Wall Street since he came to Salomon Brothers' aid as a hands-on manager when it was hit by a trading scandal in 1991. He had bought a $700 million stake in the company four years before.
  
  He eventually turned a profit on the investment, but it was a long and difficult experience for him, making tonight's news especially unexpected.
  
  In a brief off-camera telephone conversation tonight, Buffett told CNBC's Becky Quick he loves the terms of the deal and he loves Goldman. (It's important to note that Buffett got a much better deal than any individual investor could hope for.)
  
  Even so, Becky tells me she's "stunned" by this development, and I am too. Neither of us can believe it just now.
  
  Becky jokes she would have predicted that Buffett would buy a stake in Pepsi, arch-rival of his beloved Coca-Cola, before he put money into a Wall Street firm again.
  
  She expects to speak extensively with Buffett live on the air tomorrow (Wednesday) morning just after 8a ET on Squawk Box. They'll cover the Goldman investment as well as everything else that's happening in the financial world right now, including his support of the administration's increasingly controversial bailout plan.
  
  While Buffett came to New York to help run Salomon years ago, its inconceivable that he would leave Omaha this time around to pitch in at Goldman's executive suite.
  
  Buffett is quoted in the release with some very positive comments about Goldman, which recently converted from an investment bank to a bank holding company.
  
  "Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
  
  Goldman CEO Lloyd Blankfein returns the favor in his quote. "We are pleased that given our longstanding relationship, Warren Buffett, arguably the world’s most admired and successful investor, has decided to make such a significant investment in Goldman Sachs. We view it as a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalization and liquidity position."
  
  Berkshire will also receive warrants to purchase $5 billion of common stock with a strike price of $115 a share. The warrants can be used at any time over a five year period.
  
  In addition, Goldman will raise at least $2.5 billion in common equity through a public offering.
  
  Goldman shares are higher in after-hours trading tonight (Tuesday.) Morgan Stanley is also gaining.
  
  Buffett's strong endorsement of the newly minted "bank holding company" could help lift the financial sector, and the entire stock market, when trading gets underway in the morning.
  

And for future reference, here is the five year chart of Goldman Sachs.

Marc Faber: Feds Were Like Drug Dealers!!!!

Dr. Marc Faber did not mince his words when he appeared on CNBC.

• "About 15 percent of U.S. households have negative equity. Who supplied the leverage into the system? It's called the Federal Reserve Board," Faber said.
  
  "If I'm the drug dealer I'm not responsible that everybody takes drugs, but I facilitate it, especially if I give it out free of charge, I can enlarge the market share, and that's what the Fed has done."
  
  Liquidity will dry up even more, volatility will stay high and financial assets are going to suffer as the crisis continues to unfold. The bailout plan is unlikely to work and the global economy will take the hit, he predicted.
  
  "People rely on the people in Congress, at the Fed, at the Treasury, people that brought us into this trouble, to take us out of trouble. I don't think they will succeed," Faber said. "We can have recovery rallies but a new high on the S&P is practically out of the question for a very long time. In real terms, equities are still very high and economically, I think the world will go into a slump."
  
  The main provider of global liquidity was the U.S. current account deficit, which increased at a fast pace over the past 10 years, but this will no longer be the case.
  
  "Next year, if the economy in the U.S. is as weak as I think it would be, the trade and the current account deficit will continue to contract," Faber said. "When global liquidity contracts, it's not a good time for financial assets."
  
  Other sources of funding, such as foreign reserves of resources-rich countries, are also likely to dry up, Faber said. "I think sovereign wealth funds are going to be very busy supporting their own markets, they won't have much money to buy assets around the world."

And he feels that the short selling ban is sooooooooooo stupid!

• Volatility comes from the fact that, as the private sector tightens lending conditions to adjust its risk management, central banks are injecting liquidity in the money markets to grease the system, he said, adding that banning short-selling will not contribute to reducing volatility and was a "stupid measure."
  
  "Short sellers are not responsible for current problems. The current problems are caused by the US Fed (Federal Reserve), that was sitting there and letting credit growth go out of bounds," Faber said.
  
  "We have to see very clearly that the cause of the problem was excess leverage. The biggest hedge funds were Fannie Mae and Freddie Mac, they had the leverage of one over 150 and under the eyes of Congress, under the eyes of the SEC and everybody… and nobody did anything about it. Then, people go and bitch about the short sellers," he added.
  
  The fact that the rules on short-selling are changing nearly daily, with new names added to the list of securities in which short-selling is banned or with specific rules regarding hedging and confidentiality contributes to adding uncertainty, he said.

Source: http://www.cnbc.com/id/26848829

Some Interesting Comments

Bob Pisani had some interesting stuff to say regarding yesterday's markets.

• The despair of Wall Street, redux. Volatility with no volume. That's what we got today. The Dow swung in a 400 POINT RANGE, but volume was about half what it was at the end of last week.
  
  Why? Some said too much uncertainty over the Treasury bill, some said with no short sellers adding liquidity, what do you expect? Others said the reflation trade has added another level of confusion.
  
  The markets may have acted negatively over concern about all the strings Democrats are attaching to the Treasury Department rescue plan, but don't kid yourself: a deal will get done.
  
  Still, don't underestimate what this bill is doing to the psychology on the Street. Most stock traders would be willing to accept more help for homeowners facing foreclosure as part of the bill.
  
  What's left? Some Dems want a stake (warrants) in any company that sells assets to the program. That's a problem. We're selling you the assets, below market price probably, and you still want warrants?
  
  Also an issue: drastically limiting pay for executives. We are probably not just talking about CEOs. We're probably talking about anyone in management. And--as we all know--commercial bank management makes A LOT less than investment bank management. ( my comments: yes about time, yes? Those buggers were paid insanely. It's totally obscene that anyone could be paid so much! )
  
  Bottom line: less business, less pay, less reward. That's what Wall Street management is facing today.
  
  Little wonder some guys are thinking of getting out altogether.
  

Source: http://www.cnbc.com/id/26841732

Did JP Morgan Got 'Bailed Out'??

On today's FinancialSense market wrap commentary, market commentator Rob Kirby wrote a highly interesting piece called, And the Band Played On

The following passages were most interesting.

• Late last week, I wrote about a very strange occurrence – the reporting of J.P. Morgan “transferring” 138 billion dollars to Lehman, after Lehman had already filed for Chapter 11 bankruptcy early last Monday morning.
  
  This bears repeating.
  
  The advance was reportedly “to allow” Lehman to settle securities trades with clients. J.P. Morgan was then immediately reimbursed by the Federal Reserve for the same 138 billion.
  
  What was not originally reported, or likely not understood at the time due to the types of securities that Lehman did most of their business in [Credit Derivatives], it is a virtual certainty that J.P. Morgan [the largest derivatives player in the world with 8.1 Trillion in Credit Derivatives alone] was the “client” [the other side of the Lehman trades that needed to be settled].
  
  The critical piece of information that completes the daisy-chain: The world only learned about J.P. Morgan’s 138 billion advance from a bankruptcy court document, where Lehman was asking the court for the authority to give the settlement of claims of J.P. Morgan “special status.”
  
  Here’s how this flow-of-funds looks visually:
  
  
  It is highly likely [or a certainty on my planet] that J.P. Morgan was INSOLVENT and was “BAILED OUT” last Monday, September 15, to the tune of 138 billion dollars. This would explain why the Fed and Treasury dictated that Lehman fail – to disguise or otherwise obfuscate the recapitalization of or illicit transfer of 138 billion to A MUCH SICKER, TEETERING ENTITY, J.P. Morgan Chase.
  
  This makes sense. Investment banks are dropping like flies, owing to their involvement in credit derivatives – this is a fact.
  
  J. P. Morgan is – HANDS DOWN – the largest derivatives player in the world with a book of 90 Trillion in notional value on March 31, 2008 – with 9% of the book composed of Credit Derivatives. That amounts to a cool 8.1 Trillion worth of Credit Derivatives. We know this from the Office of the Comptroller of the Currency’s Quarterly Derivatives Report – pg. 24.

read rest of his article here ...

More on Privatisation of VADS

More on Privatisation of VADS

OSK wrote the following the following in their report.

• Farewell To A Gem
  
  TM has proposed to privatise VADS at RM7.60 per share, matching our target price for the stock, which values the company at 12x FY09 EPS. We view the takeover as a beneficial exit option for minority shareholders as it addresses the stock’s illiquidity. We believe TM had taken cognisance of this in arriving at the offer price, with due consideration for VADS’ solid balance sheet. Hence, we are of the opinion that the minorities should acquiesce to the offer. Fully valued at RM7.60.
  
  Offer price at our target of RM7.60. TM has proposed to undertake the privatisation of VADS at RM7.60 per share implemented via selective capital repayment. The deal values VADS at 12x FY09 EPS, or a market capitalisation of RM1bn, matching our target price for the stock. The offer, which carries a 12% and 18.4% premium over the stock’s last traded and the 5-day volume weighted average price respectively, has adequately factored in the company’s enviable cash flow/balance sheet and dividend prospects.
  
  Solid fundamentals. VADS has not disappointed given its successive y-o-y growth in revenue and earnings, charting CAGRs of 28.6% and 39.3% respectively since listing in 2002. Its earnings are highly visible, thanks to strong recurring revenue from the managed network services (MNS) segment. The focus on the business process outsourcing (BPO) space unlocks a strong revenue stream and is expected to spearhead earnings growth going forward. We project EPS growth at a healthy 25% on average p.a. going into FY10.
  
  One more bites the dust. We were one of the first to commence coverage on VADS in 2005 and had consistently picked the stock as our top pick in the small cap ICT sector for 3 consecutive years. Its privatisation will undoubtedly remove a jewel whose track record is difficult to emulate. The scarcity value attached to the stock is reflected in the takeover price, which we deem fair. We advise minorities to accept the offer as it is a good exit strategy to unlock the value of a stock that has been plagued by liquidity constraints and is trading at an unwarranted discount to its global BPO peers.

This is where it is sooooooooooooooo wrong.

Acquiesce to the offer?

According to my pal Wikiseng, to acquiesce is to knowingly standing by without raising any objection to infringement of his rights...

So if I am not flawed again, is OSK telling VADS minority shareholders just to accept the offer, in regardless?

Forget about the fact that company has solid fundamentals?

Forget about the fact the stock had managed to register stellar CAGR growth of 28.6% and 39.3% since listing?

Forget about the fact the offer price is priced only at 12x FY09 EPS?

Forget about asking if the offer price is justifiable or not?

Just acquiesce to the offer.

Sad isn't it?

Don't you think you are not fully compensated?

So how?

Better consider what happens here before you invest in any listed subsidiary.

So long farewell, it's time to say goodbye....

The Day The World Almost Ended.

Here's an interesting write on how the events unfolded last week, Almost Armageddon

• The market was 500 trades away from Armageddon on Thursday, traders inside two large custodial banks tell The Post.
  
  Had the Treasury and Fed not quickly stepped into the fray that morning with a quick $105 billion injection of liquidity, the Dow could have collapsed to the 8,300-level - a 22 percent decline! - while the clang of the opening bell was still echoing around the cavernous exchange floor.
  
  According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.
  
  The panicked selling was directly linked to the seizing up of the credit markets - including a $52 billion constriction in commercial paper - and the rumors of additional money market funds "breaking the buck," or dropping below $1 net asset value.
  
  The Fed's dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.
  
  While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.
  Without commercial paper, "factories would have to shut down, people would lose their jobs and there would be an effect on the real economy," Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.
  
  Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund - which touted itself as super safe - fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default - which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.
  
  By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.
  
  Banks, which usually keep an average of $2 billion in excess reserves earmarked for withdrawals, pumped that up to an astounding $90 billion by Wednesday, Lou Crandall, chief economist at Wrighton ICAP, told The Journal.
  
  And for good reason. By the close of business on Wednesday, $144.5 billion - a record - had been withdrawn. How much money was taken out of money market funds the prior week? Roughly $7.1 billion, according to AMG Data Services.
  
  By Thursday, that level, fed by the incredible volume of sell orders pouring in from institutional investors like pension funds and sovereign funds, had grown to $100 billion. It was still not enough to stem the tidal wave.
  
  The banks knew something drastic had to be done. So did Paulson.
  
  The injection of capital into the market was followed up by calls from Treasury Secretary Hank Paulson to major money market players like Bank of New York Mellon and State Street in Boston informing them that federal money was in the market and they should tell their clients the Feds would be back with a plan to stem the constriction in the credit market.
  
  Paulson knew the $105 billion injection was not a real solution. A broader, more radical answer was needed.
  
  Hours after Paulson made his round of calls to calm the industry, word leaked out that an added $1 trillion bailout of banks was being readied. Investors cheered. At about 3 p.m., news of the plans was filtering up and down Wall Street, fueling a 700-point advance in the Dow Jones industrial average through 4 p.m. Friday.
  
  By that time, Paulson had announced the plan. It included insurance on money market accounts, a move that started in quiet Thursday morning, when the former Goldman Sachs executive saved the country from a paralyzing meltdown.
  
  

Privatisation of VADS

Life is never fair and when nothing is done history will repeat itself.

Blogged on Dec 16th 2005, Privatisation Issues

• The issue of privatisation and the subsequent delisting of a listed subsidiary.
  
  Generally there are two ways companies can be delisted from a stock exchange in.
  
  The first case is the enforced, compulsory delisting of a company, in which the stock exchange forces the delisting of the stock because the listed company has failed to comply with the stock exchange listed requirements. And these are usually based on commercial reasons in which the listed companies simply cannot operate in a profitable manner.
  
  The second manner a company can be delisted from a stock is where the company voluntary informs the exchange that they no longer want to be listed. And a variation of this case, is the delisting of a listed subsidiary is made by its holding company, in which the minority shareholder of the listed company is forced to choose between the offered compensation price or risk being involved in a private company, which would ultimately offers no transparency rights.
  
  I have no problem at all with the first case. These are them bankrupt cases. Them 'koyak' companies. 'Chap-lap' companies which are losing money like crazy.
  
  The second one, the privatisation and the subsequent delisting of the listed subsidiary, this one I really don't like at all.
  
  It's just totally unfair to the minority shareholder and it makes a total mockery of the whole stock exchange.
  
  Listed Companies should not be given the approval so easily to privatise their listed subsidiary company in which the general investing public is forced or threatened with the issue of delisting. And as mentioned earlier once the company is delisted this offers the investor no transparency rights at all. So when a listed company is able to list and delist their subsidiary companies as per their wimps and fancy this would make a total mockery of the stock exchange.
  
  And what about the general offer price for the minority shareholders stake in that listed company? Would the minority shareholders get an offer that is fair or would the minority shareholder be placed in a disadvantage position? Would the premium offered over the existing share price to adequately compensate the minority investors?
  
  If no, this ultimately means that the minority investors would never be given a chance to being adequately compensated for the permanent withdrawal of a good investment opportunity.
  
  And if this is the case, then this would contradict the government's plan to woo more investors into Bursa Malaysia cause investing would have indeed turned very unattractive, a game which is very biased against the investing public.

Where did it start?

My first encounter was on Bumi Armada and its detalied in full here.

1. http://whereiszemoola.blogspot.com/2006/09/pirates-which-siezed-armada.html
2. http://whereiszemoola.blogspot.com/2006/09/more-on-privatisation-issue.html

We then have MetroJaya.

1. http://whereiszemoola.blogspot.com/2006/11/muis-purchase-of-metrojaya_02.html
2. http://whereiszemoola.blogspot.com/2006/11/muis-purchase-of-metrojaya-ii.html

The unbelievable privatisation of Johor Port.

1. http://whereiszemoola.blogspot.com/2005/12/privatisation-issues_16.html

Oh how about a stock like Powertek?

Let me ask yet again.

How could I safely know that I would ever be fully compensated for taking the investment risk in investing in a company listed subsidiary when the holding company can list and delist as per wimps and fancy?

Recently, IJM wants to privatise their listed subsidiary. Receipt of Notice of Voluntary General Offer from IJM Corporation Berhad

Today we see another privatisation case where Telekom Malaysia wants to delist its listed subsdiary VADS via privatisation exercise.

• KUALA LUMPUR (Dow Jones)--Telekom Malaysia Bhd. (4863.KU) is proposing to buy the remaining shares in Vads Bhd. (7150.KU) that it doesn't currently own for MYR7.60 per share in a move to take the company private, Vads said Monday.
  
  In a filing with the stock exchange, Vads said the proposed buyout will involve a selective capital reduction and repayment exercise.
  
  Telekom currently owns 83.4 million shares or 63.3% of Vads.
  
  Vads shares, which were suspended Monday pending the announcement, closed Friday at MYR6.80.
  

It just does not end.

For sure the minority shareholders are not happy with the less than generous offer by these holding company.

Yup another sad day where the minority shareholders do not get a fair compensation for taking the investment risk in investing in these listed subsidiaries.

What can an investor do next time?

How about being a tiny bit wiser and AVOID investing in these subsidiaries? What's the point of it all when the investor has not chance of getting a fair investing compensation?

Short Note On Hai-O Earnings

Blogged last April Review Of Hai-O and More On HaiO

HaiO reported its earnings last Friday.

Quarterly rpt on consolidated results for the financial period ended 31/7/2008

Quarterly earnings was at 13.602 million, which is a huge worry, for its previous quarter in June 2008, HaiO reported reported earnings of 18.942 million. (see Quarterly rpt on consolidated results for the financial period ended 30/4/2008 )

And despite the tremendous weakness on a quarter-to-quarter comparison, folks at OSK has discounted it by suggesting that it's mere seasonal weakness. Here's what OSK said in their earnings review of HaiO's earnings.

• Hai-O registered another set of strong results with 1Q earnings of RM13.6m, 70% higher than our estimates, while revenue and earnings expanded 90.5% and 94.3% respectively. All divisions recorded positive revenue growth, especially the MLM division, which grew 126.6%. Q-o-q earnings were, however, 28.3% lower due to seasonal factors as 1Q is the weakest quarter for the entire year. We are reducing our earnings forecast and target price despite the strong 1Q earnings in view of the weaker consumer sentiment due to higher fuel price, CPI and bearish market. Nevertheless, Hai-O is still a BUY with target price of RM4.50.

All In The Name Of Making Extra Profits?

This is EXTREMELY sickening and disgustibating!!!

I would like to highlight the following article from Reuters published on CNBC.

• The number of Chinese infants sick in hospital after drinking tainted milk formula has leapt to nearly 13,000, and Premier Wen Jiabao told alarmed parents that companies responsible will face harsh punishment.
  
  The Health Ministry said the number of children ill from milk powder contaminated with the industrial chemical melamine had risen from a previously announced total of 6,244 -- which included many who had left hospital -- to 12,892.
  
  Over 80 percent of the sick were aged under two.
  
  The big jump was announced late on Sunday, another escalation in China's spreading milk scandal that has tarnished the "made in China" brand after last year's scandals over everything from the safety of toothpaste and drugs to petfood and toys.
  
  Wen visited hospitals in the national capital in a bid to reassure an anxious public.
  
  "We must make the physical health of the public a priority," he told parents and staff, according to Xinhua news agency.
  
  "The most crucial point is that after a clean-up there can be no problems at all with newly produced milk products. If there are fresh problems, they must be even more sternly punished under the law."
  
  China's food quality watchdog has said it found melamine in nearly 10 percent of milk and drinking yoghurt samples from three major dairy companies: Mengniu Dairy, the Inner Mongolia Yili Industrial Group, and the Bright Group.
  
  But the Health Ministry said no cases of illness have been founded related to liquid milk.
  
  Nitrogen-rich melamine can be added to watered-down milk to get past quality inspections, which check for nitrogen to measure protein levels.
  
  Parents Panic
  
  Panicked parents have crowded China's hospitals and demanded redress since officials and the Sanlu Group, the country's biggest maker of infant milk powder, said two weeks ago that babies developed kidney stones and other complications after drinking the tainted milk.
  
  Sanlu failed to publicly disclose the problem for at least a month, throughout August when Beijing hosted the Olympic Games, officials have said.
  
  The government has promised free treatment for stricken children, but some parents said they worried about long-term complications and costs.
  
  "The recovery period could be long," said Li Lingna, waiting in a Beijing hospital to determine whether her two-year old boy's kidney problems were related to his milk powder.
  
  "We're worried about what this will do to his resistance, with winter and colds coming on. So many problems lie ahead."
  
  In the wake of the scandal, other countries and regions have clamped down on China's milk products. Markets that that have banned or recalled these products include Brunei, Singapore, Malaysia, Japan, Hong Kong and Taiwan.
  
  Even White Rabbit Creamy Candy, a popular Chinese brand of milk sweet, has been contaminated with melamine, Singapore's Agri-Food and Veterinary Authority warned on Sunday.
  
  Over the weekend a three-year-old Hong Kong girl was found to have a kidney stone after drinking a milk product tainted by melamine, making her the territory's first suspected victim of the scandal.
  
  Premier Wen said that dairy products that passed safety tests would be labelled so that consumers can "be at ease."
  
  But the complications from the country's lastest food safety crisis are likely to endure.
  
  The Chinese Ministry of Agriculture said despairing farmers were dumping milk and killing cattle after companies stopped buying their supplies, according to Xinhua. The ministry promised subsidies to help struggling milk farmers.

Source: http://www.cnbc.com/id/26827853

Details Of The Bailout..

Just for the record, the following article from Reuters, published on CNBC website, highlights where the bailout money is going. It's really mind boggling to say the least but what else can we expect when these investment bankers are doing 40-1 leverages!

• Following are details of actions, proposals and amounts:
  
  —Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.
  
  —Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.
  
  —The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.
  
  —At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.
  
  —Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.
  
  —$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.
  
  —At least $87 billion in repayments to JPMorgan Chase [JPM 47.05 6.75 (+16.75%) ] for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers. Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.
  
  —$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.
  
  —$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.
  
  —$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.
  
  —$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.
  
  —At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.

Yeah, the potential tab is only $1.8 TRILLION!!!!!!!!!

Holy cow!

Source: http://www.cnbc.com/id/26808715

John Mauldin Writes On Betting On Financial Armageddon!

In this week's newsletter, John Mauldin writes the following Betting on Financial Armageddon

This is one issue, you should read and if you are not a subscriber to his weekly newsletter do subscribe to his newsletter via his link here

The following passage on what needs to be done is taken from this week's newsletter Betting on Financial Armageddon

• It simply takes your breathe away. As President Bush said today, it does not help to find who is at fault today, we have to figure out how to get out of this mess. It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number.
  
  For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down.
  
  As Barry Ritholtz wrote: "So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis." (Don't get me started on blaming the short sellers. Let's not blame the people who leveraged up their companies 40 to 1 with bad investments.)
  
  We absolutely must move credit default swaps to a regulated exchange, no matter how much investment banks and hedge funds scream. Must be done. Do it now. Real rules about writing mortgages, although now that losses are in the hundreds of billions, underwriting rules are already becoming quite restrictive.
  
  And while we are at it, a thorough revamping of the rating agencies and the rules they use should be at the top of someone's list.
  

A Brand New Financial World??

Holy Cow!

My oh my.

What's next?

And it seems that Hitler is getting extremely popular and according to sources, the current financial mess is so terrible that even Hitler has gotten the dreaded margin calls! No joke.

Here's the video evidence and I would like to warn everyone that this clip is not for the faint hearted!

Hope you had enjoyed it as much as I had!

Have a wonderful weekend!



ps: See also this posting made a couple of months ago: Cristiano Ronaldo Leaves Manchester United!!

Money Market Fund Warns Of Losses!

WOW! Here's an article about a money market fund warnings of losses!

It's amazing and truly shocking, in my opinion, for I always assumed that money market funds, despite its low returns was always a safe investment because money market funds basically invests in bonds issued by government.

However, this is not the case for Primary Fund.

Here's the article posted on Herald Tribune: Money market fund warns of losses

• Money market fund warns of losses
  By Diana B. Henriques
  
  Wednesday, September 17, 2008
  In a new sign of market turbulence, managers of a multibillion-dollar money market fund said on Tuesday that customers might lose money in the fund, a type of investment that has long been considered as safe and risk-free as a bank savings account.
  
  The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.
  
  The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.
  
  This is only the second time in history that a money market fund has "broken the buck" — that is, reported a share's value was less than a dollar.
  
  This year alone, big banks and fund management companies have pledged more than $10 billion to rescue affiliated money funds that were caught holding mortgage market securities that were deteriorating rapidly in value. As a result, consumers have felt confident in the safety of money funds, and have been moving assets into such funds as markets have grown more turbulent.
  
  The Investment Company Institute, the mutual fund industry's trade group, issued a statement Tuesday assuring investors that "the fundamental structure of money market funds remains sound." It noted, too, that in the only previous case of a fund breaking the buck, investors nevertheless were paid 96 cents on the dollar.
  
  But the Reserve Fund's announcement may shake investors' confidence. Moreover, institutional markets that are already under severe stress could be further shaken if this giant fund, and others like it, are forced to sell some less-liquid holdings to meet redemption demands from nervous customers in coming weeks.
  
  The Primary Fund allowed its share price to fall below a dollar "after reviewing the unprecedented market events of the past several days and their impact" on the fund, the company said in a statement.
  
  Specifically, the fund's management, which boasted as recently as July about its cautious approach to the current crisis, determined that its stake in debt securities issued by Lehman Brothers Holdings, with a face value of $785 million, was essentially worthless, given the investment bank's filing for bankruptcy protection. As a result, the fund said, its per-share value fell to 97 cents a share.
  
  The fund's financial records also show that more than half of its portfolio on May 31 consisted of asset-backed commercial paper and notes from a host of issuers besides Lehman, few of them names likely to be familiar to the financial markets.
  
  If these arcane investments had to be sold or cashed out quickly to meet redemptions, it is unclear what prices they would fetch or whether the issuers would be able to return the fund's money promptly, said Keith Long, of Otter Creek Management, a hedge fund based in Palm Beach, Florida
  
  The Primary Fund reported that, until further notice, it would delay paying redemptions to customers for up to seven days, as permitted under mutual fund law. That delay will not apply to debit card transactions, automated clearinghouse transactions or checks written against the assets of the Primary Fund, provided that the transactions do not exceed $10,000 from single or affiliated investors.
  
  The fund is part of the complex run by Bruce Bent, who invented the money market fund concept with Henry Brown in 1970.
  
  Since their inception, money market funds increasingly have been seen by individual investors as a safe harbor in turbulent times. According to industry statistics, the assets of money funds have grown sharply since the credit crisis began to intensify last summer.
  
  But, as prospectuses and regulators make clear, money funds are not legally required to keep their share prices at or above a dollar, or to redeem investors' shares immediately. Like all regulated mutual funds, their share prices are determined solely by dividing total portfolio assets by the number of shares outstanding, and they have seven days to meet redemption demands.
  
  Those facts would probably surprise most money fund investors, who have come to think of money funds as being "just like cash, just like a checking account," a fund industry lawyer, Jay Baris, said.
  
  Whenever money funds have run into trouble, they have been propped up by parent banks and investment managers that provided the necessary cash. The single exception was in 1994, when one small regional money fund reported a share price below a dollar, according to the Investment Company Institute.
  
  The continuation of this informal bailout policy "is much discussed in the fund industry, because funds are so much bigger today," said Barry Barbash, a fund industry lawyer with Wilkie Farr & Gallagher and a former senior mutual fund regulator at the Securities and Exchange Commission.
  
  In the past, regulators tended to focus on banning money funds from buying inappropriate investments in the first place, he said. "But now," he added, "we're talking about instruments that were completely appropriate for a money fund when they were purchased. That's what makes this so much harder."
  
  Not only are funds bigger, markets are more turbulent. Many mutual funds have found their portfolios battered by investments in commercial and investments banks that were long considered close to bedrock on Wall Street. Money funds, too, suddenly found that some of their blue chips were tarnishing.
  
  But with individual mutual fund investors showing little sign of panic, most funds have simply ridden out the current turbulence.
  
  Several industry analysts said on Tuesday, however, that the Reserve Fund's action came after its Primary Fund was hit by heavy redemption demands that intensified the impact of the Lehman losses.
  
  "We're really in uncharted territory here," said Peter Crane, the president of Crane Data, a fund industry newsletter.
  

Holy Cow! Only Half A Trillion?

Yes, that's the estimates on how much this new 'rescue' package would cost.

• By Steve Liesman
  CNBC
  updated 11:24 p.m. ET Sept. 18, 2008
  
  WASHINGTON - Treasury Secretary Hank Paulson briefed congressional leaders Thursday night on plans to address the "illiquid assets" on U.S. financial institutions' balance sheets, possibly including the creation of a government facility to take on financial firms' bad debts.
  
  The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion dollars and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official.
  
  The plan would have two parts. The largest part would be the purchase of private-label (those underwritten by Wall Street) mortgages by some as-yet unnamed vehicle. Financing would occur through the sale of treasuries, the official said. That part of the plan would require congressional approval. The idea is to hold the securities to maturity. The average mortgage has a life of about 7 years.
  
  A second part of the plan would involve the purchase by Treasury of additional government-backed (Fannie Mae and Freddie Mac) mortgages under a plan it announced several weeks ago to rescue the two government-sponsored entities. Back then, it said it would purchase $5 billion initially. The idea is to ramp up those purchases more quickly. It does not require approval by Congress.
  
  The administration is contemplating hiring a private investment manager to run the mortgage vehicle. Yet to be worked out with Congress are the amount of mortgage securities the government would buy and from whom the government would accept them.
  
  The price to be set on those purchases and the process for setting it was also unknown.
  
  CNBC first reported the creation of a Treasury plan, similar to the Resolution Trust Corp., that would take mortgage backed securities off the market.....

read rest of article here on msnbc http://www.msnbc.msn.com/id/26780312/

Kathy explains it better on her write-up, Resolution Trust Corp: What is it and Will it Help the Markets?.

• Resolution Trust Corp (RTC) sent the stock market surging and gold prices plunging. New traders may wonder what the RTC is and how it can help the markets.
  
  The RTC is essentially a government owned asset management company that is tasked with taking over and eventually liquidating faulty assets. It was first created as a result of the Savings and Loans crisis of the 1980s. For the readers of the Wall Street Journal, former Fed Governor Paul Volcker, former US Treasury Secretary Brady and former US Comptroller Ludwig wrote an opinion piece on Wednesday calling for the current Administration to resurrect the RTC.
  
  The idea was then floated around by current US Treasury Secretary Paulson this afternoon, triggering the sharp reversal across the financial markets. USD/JPY traded as low as 104.00 just a few hours before talk of the RTC hit the newswires and afterwards, it rallied up to 105.78. However the more important question to ask is whether or not an RTC will help. The problem in the financial markets right now is not with lending but with letting money go. No one is willing to take on risk, but if the RTC is willing to do so and keep it in house for a months or even years before liquidating so as not to flood the markets with bad assets, it can help. According to the opinion letter in the WSJ, if the RTC buys the bad debts, it accomplishes the following:
  
  1. Restores Liquidity
  2. Orderly Liquidation of Troubled Paper
  3. Reduces Foreclosures because the Agency Would Manage Mortgage
  4. Can Help to Revive Banks Stuck with Troubled Paper
  
  Is the US at Risk of Losing its AAA Rating?
  
  However the big danger of inundating the US government with bad debt at a time when they have spent a tremendous amount of public funds to bailout companies like AIG is the risk of the US losing its AAA credit rating. On Wednesday, S&P said that “there’s no God-given gift of a AAA rating, and the US has to earn it like everyone else.” Although the S&P followed that statement up by saying that they are not at risk of losing their rating, we certainly believe that with the US, they will be more reactive than proactive of downgrading the government’s debt if needed. The consequences would be catastrophic if the US gets downgraded, but Americans cannot have their cake and eat it too. Not only will US tax payers have to pay for this eventually, but 15 years down the line, Medicare obligations will balloon and if the US government doesn’t get its balance sheet into shape by then, the consequences could be even more severe.
  
  Fire up the Printing Presses?
  
  This is perhaps the reason why the Federal Reserve may consider firing up the printing presses. Along with major central banks from around the world, the Fed has added $247B in a coordinated liquidity injection this morning. To pay for this, they are selling an additional $100B in short term debt, which in essence sterilizes their efforts. If that doesn’t work in stabilizing liquidity, the Federal Reserve can always print money. Printing money has its problems as well, since accelerates inflationary pressures and with inflation just beginning to trickle lower, the Fed may not want to take this gamble yet.
  
  

Bailouts And AIG's Dangerous Collapse

Two articles caught my attention this morning.

Published on CNN money, Yet another bailout - Taxpayer tally. The following passage is most interesting, for it represents a reality check on the size of the total bailouts so far.

• The Federal Reserve has backstopped the purchase of Bear Stearns to the tune of $29 billion. It will loan $85 billion to insurer AIG. It's letting banks borrow up to $150 billion using risky mortgage-backed securities as collateral. And it's letting investment banks, which it doesn't regulate, get short-term loans using the central bank's discount window.
  
  The Treasury, meanwhile, has pledged to backstop Fannie and Freddie up to $200 billion. Lawmakers passed legislation allowing the Federal Housing Administration to insure up to $300 billion in loans for troubled borrowers. They're likely to loan $25 billion to the auto industry.
  
  And the government might not be finished. Some Democrats on Capitol Hill are arguing for an expansion of the FHA program for troubled borrowers. And talk is building that the government might have to set up a fund - similar to efforts in the 1930s and 1980s - to buy bad securities clogging up the financial system.
  
  If you add up how much the Treasury and Fed have pledged or made available for loans so far, it's close to $800 billion.
  
  So what's the real cost to taxpayers for all these interventions? No one can say for sure, and probably won't be able to for some time. The Savings & Loan crisis of the early 1990s cost taxpayers a net of $124 billion in 1999 dollars, according to the FDIC - more than initially estimated but below projections made during the height of the crisis.
  
  But one thing is certain: The price tags on today's bailouts bear "no direct translation to the taxpayer cost," said Lyle Gramley, a former Fed governor now with the Stanford Group, a Washington policy research firm.
  
  Indeed, he said, "None of us knows yet if there'll be any cost to the taxpayer at all."
  
  Here's why: The bailouts are, in one form or another, loans or investments. How much they end up costing (or making) depends on a number of factors including how the economy holds up and when the real estate market recovers.
  
  "A lot depends on whether or not we get in a severe recession and how quickly we turn things around in housing," Gramley said.
  
  In exchange for their stepping in, the Fed and Treasury are getting assets as collateral (in some cases, income-producing assets and saleable assets) as well as majority ownership stakes in AIG, Fannie and Freddie. They've also claimed veto power for corporate decisions and a No. 1 spot among stakeholders who get paid first.
  
  In the case of the Fed's $85 billion loan to AIG, the central bank is charging what are essentially double-digit interest rates: specifically, the 3-month Libor (around 2.88% currently) plus 850 basis points.
  
  So what gains or losses the Treasury and Fed realize will depend on the performance of those assets and stocks, and the companies' ability to pay back their loans. Ultimately those performances rest on how soon confidence is restored to the markets and how the economy fares.

And the following editorial posed on FSU is most wworth reading, AIG’s Dangerous Collapse & A Credit Derivatives Risk Primer. It is written by Daniel R. Amerman, CFA September 17, 2008

• What is driving the fall of AIG – and potential government losses that may far, far exceed the $85 billion bailout announced late on September 16th - is not mortgages or real estate (directly), but fears that AIG’s huge, global credit-default swap positions will unravel. The $62 trillion dollar credit derivatives market is 50 times the size of the subprime mortgage derivatives market, and is indeed larger than the entire global economy.

Sometimes a simple chart makes things so simple and clear and Daniel has included the following chart.

WOW!!!!!!!

And the following passage explains the clear and precise danger.

• Where Assumptions Meet Reality
  
  Now here's the thing. The subprime mortgage market is tiny compared to the overall corporate market. A corporate market which has credit derivatives interwoven throughout. Let’s say in this day of highly leveraged companies, that a real recession does hit and it takes down something like $2 or $5 trillion worth of book value along with it. Those would be real losses. Staggering losses that dwarf what we have seen with subprime mortgages.
  
  Where is the money going to come from to pay for those losses? In theory, the way this works from an academic economics perspective is that you have all these hordes of incredibly intelligent people, each of whom is working for well-capitalized institutions, and they all backstop each other. They do so first by using that supposedly awesome collective intelligence to keep mistakes from being made in the first place. Next, the theory is that there will be multiple layers of protection available if there's a problem, to absorb any damage.
  
  Unfortunately what we saw actually happen in the real world with mortgage derivatives was just the reverse of the theory. The multiple layers of the so-called “smartest person in the room” became multiple layers of people making steadily worse (and more obvious) mistakes in the pursuit of short-term profits until the situation not just predictably – but inevitably – collapsed upon them.
  
  On top of that, far from the firms backstopping each other, in the real world we have a cascading series of credit losses that spread from one firm to another, as tens of billions of dollars in actual subprime losses multiplied out to become much larger hits to values of securities portfolios, nearly bringing down the industry together.
  
  Which again brings up the question of what happens if a real recession hits the $62 trillion credit derivatives market?

Do read the rest of his editorial here

Has The World Markets Gone Kaput?

The signs out there are terrible!

On CNBC website Nowhere Near Capitulation Yet ...

!!

Is this doomsday or what?

Everyone is shouting that this is the worse crisis yet, Worst Crisis Since '30s, With No End Yet in Sight and ECB doyen Otmar Issing calls crisis "extremely dangerous"

And then you have Michael Lewis commenting this on Sept 15th: This Is the Day Asian Capital Woke Up

• According to the bankruptcy papers thrown together over the weekend, the list of Lehman's 30 biggest unsecured creditors is dominated by Asian financial institutions: Aozora, Chuo Mitsui Trust, Sumitomo Mitsui Financial, Mizuho Corporate Bank, Shinkin Central Bank, Bank of China and so on.
  
  Who else did you imagine would be left holding this bag? Who else did you imagine was propping up the system?
  
  Ever since the government jumped in to bail out Bear Stearns Cos. -- and whatever else that was, it was a bailout -- the behavior of the U.S. government in the financial markets has felt like a mystery by an author who is cheating and withholding a key piece of information.
  
  In letting Lehman fail the federal government puts a fine point on an obvious question: Why didn't they let Bear Stearns go, too? This business about the markets having time to adjust to Lehman's problems is baloney. The markets didn't adjust to Bear Stearns collapse; the markets looked at what the Fed had done for Bear Stearns and assumed they'd do it for Lehman.
  
  Unfounded Fears
  
  One part of the answer is that the people who sit on top of our financial system simply didn't know what would happen if a big Wall Street firm went down. They have since studied the matter and concluded that their worst fears were unfounded.
  
  But in Lehman's list of creditors we have another part of the answer, I'll bet. It wasn't merely instability the U.S. Treasury and the Federal Reserve feared. It was the loss of the good opinion of the people who supply the U.S. with the capital it no longer generates itself. For 25 years Asian financial firms have been amazingly indulgent of U.S. investment bankers.
  
  What do you think they're saying about them -- and us --now.

And it's no wonder that Asian markets are being hit bad, especially Hong Kong. This morning Raw Fear Slams Stocks, Hong Kong Plunges 7%

And the Russians aren't doing so good either. Russia's Stock Market Woes

• STRATFOR - The Russian markets plunged on September 16 before government authorities halted trading on the exchange an hour early; the MOSCOW Interbank Currency Exchange fell 17 percent, and the dollar-denominated Russian Trading System (RTS) fell 12 percent.
  
  The carnage built upon ongoing losses in the Russian economy that have now seen the RTS fall by nearly 60 percent since its mid-May highs. The Russian ruble has recently become the world’s worst-performing major currency.
  
  Russian government officials insist that this is simply a passing storm that has nothing to do with the August invasion of Georgia. While obviously an overstatement, there is something to the claim. Western financial institutions — and investment houses specifically — currently are engaged in a flight to quality investments. Russia, despite its ongoing impressive energy and minerals exports, simply never made the list of the top tier of reliable assets.
  
  But the fact remains that investors — and especially foreign investors — are scared. They were already nervous about the Kremlin’s flagrant targeting of foreign assets, and now the Russian willingness to invade its neighbors is most certainly a factor, as is the falling price of oil (Brent crude pushed below $90 a barrel Tuesday). Yet while the Russian stock markets are suffering because of the uncertainty, Russia is not necessarily suffering.

Chris Perruna's charts comparison of Shanghai and Nasdaq is most interesting, Shanghai is a Nasdaq Déjà vu

And the following webpage on NYTimes shows the extend of the damages: http://www.nytimes.com/interactive/2008/09/15/business/20080916-treemap-graphic.html

So is Wall Street kaput?

• Wall Street as we know it is kaput. It is not just that Merrill Lynch agreed to be purchased by Bank of America or that the legendary investment bank Lehman Brothers filed for bankruptcy or that the insurance giant AIG is floundering. It is not even that these events followed the failure of the investment bank Bear Stearns or the government's takeover of Fannie Mae and Freddie Mac, the largest mortgage lenders. What's really happened is that Wall Street's business model has collapsed.
  
  Greed and fear, which routinely govern financial markets, have seeded this global crisis. Just when it will end isn't clear. What is clear is that its origins lie in the ways that Wall Street -- the giant investment houses, brokerage firms, hedge funds and "private equity" firms -- has changed since 1980. Its present business model has three basic components.
  
  First, financial firms have moved beyond their traditional roles as advisers and intermediaries. Once, major investment banks such as Goldman Sachs and Lehman worked mainly for their clients. They traded stocks and bonds for major institutional investors (insurance companies, pension funds, mutual funds). They raised capital for companies by underwriting -- selling -- new stocks and bonds for the firms. They provided advice to corporate clients on mergers, acquisitions and spinoffs. All these services earned fees.
  
  Now, most financial firms also invest for themselves. They use partners' or shareholders' money to place bets on stocks, bonds and other securities -- so-called "principal transactions." Merrill and other retail brokers, which once served individual clients, have ventured into investment banking. So have some commercial banks that were barred from doing so until the repeal in 1999 of the Glass-Steagall Act of 1933.
  
  Second, Wall Street's compensation is heavily skewed toward annual bonuses, reflecting the profits traders and managers earned in the year. Despite lavish base salaries, bonuses dominate. Managing directors with 15 years' experience can receive bonuses five to 10 times their base salaries of $200,000 to $300,000.
  
  Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.
  
  Leverage can create huge windfalls. Suppose you buy a stock for $100. It goes to $110. You made 10 percent, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you've made 10 percent on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.) If it goes to $110, you've doubled your money. Wow.
  
  Once assembled, these components created a manic machine for gambling. Traders and money managers had huge incentives to do whatever would increase short-term profits. Dubious mortgages were packaged into bonds, sold and traded. Investment houses had huge incentives to increase leverage. While the boom continued, government remained aloof. Congress resisted tougher regulation for Fannie and Freddie and permitted them to run leverage ratios that, by plausible calculations, exceeded 60 to 1.
  
  It wasn't that Wall Street's leaders deceived customers or lenders into taking risks that were known to be hazardous. Instead, they concluded that risks were low or nonexistent. They fooled themselves, because the short-term rewards blinded them to the long-term dangers. Inevitably, these surfaced. Mortgages went bad. The powerful logic of high leverage went into reverse. Losses eroded firms' tiny capital bases, raising doubts about their survival. This year, Lehman lost nearly $8 billion in "principal transactions." Otherwise, it was profitable.
  
  How Wall Street restructures itself is as yet unclear. Companies need more capital. Merrill went to Bank of America because commercial banks have lower leverage (about 10 to 1). It seems likely that many thinly capitalized hedge funds will be forced to reduce leverage. Ditto for "private equity" firms. In time, all this may prove beneficial. Financial firms may take fewer stupid and wasteful risks -- at least for a while. Talented and ambitious people may move from finance, where they were attracted by exorbitant pay, into more productive industries.
  
  But the immediate effect may be to damage the rest of the economy. People have already lost their jobs. States and localities, particularly New York City and New Jersey, that depend on Wall Street's profits and payrolls will face further spending cuts. Banks and investment banks may tighten lending standards again and impede any economic recovery. The stock market's swoon may deepen consumers' pessimism, fear and reluctance to spend. There may be more failures of financial firms. It's hard to know, because financial crises resemble wars in one crucial respect: They result from miscalculation.

Still Who Wants Huann?

Received a comment on the posting Who wants Sino Hua-An? ( see also Regarding Sino Hua-An )

• Ivan's investing diary said...
  
  Moola,
  
  No doubt , you are figure expert. But I think you do not have a good understanding on how to run a business.
  
  1st
  Revenue increase, margin drop as its raw material are increasing faster than its products sold. On the other hand,If commodities price drop , its cost of raw material will drop as well. That translate to lower raw material and better margin.
  
  2nd
  The profit of the company in 2007, 127,522,000.
  
  Culmulative profit for 2 Quater 2008
  72,484,000
  
  Projected 4 Quater (same as 2007)
  128,000,000 ( Total)
  
  Market Value of the company
  1,122,307,817 * 0.33 = 370,361,579
  
  thus we get
  
  pe= 3
  
  Its cash reserve on 2008 = 75,739,000
  
  The company is debt free
  
  Analysis
  ---------
  Even earning is flat for 3 years i will get the stock for free on the 4th year. More than 33% a year plus its cash reserve.
  
  
  3rd
  Yes, you can buy cyclical stock (timber, plantation, steel etc)when the commodities is in bull. But how much you have to pay for, rocket high price ?? Or when the newspaper say .. oh ya xxx worth to buy now? revise target price of xxxx upside to XXXX? Js like what happen few month ago when all the steel counter traded at record high price? (If one are thinking of fast money, i guess cyclical stocks is definetely not a good choice.)
  
  Or Rather to buy something when someone are willing to sell you at a ridiculous cheap price keep it and wait for good timing to sell?
  
  Commodities bull in china havent die. Travel to China and have a look. It will make you 10 times better than to do reading online. Thinks as a contrarian, it will make you rich beyond your imagination.

Dear Ivan,

• No doubt , you are figure expert. But I think you do not have a good understanding on how to run a business.

Thanks for opinions. I am flattered. Some actually believes that my analysis is flawed. Which is rather puzzling for I had only given my view point on a stock. Perhaps it's rather useful that I highlight this posting again, Disclaimer & Closure & Some Random Musings

Let me indulge again.

• First thing first. I would like to repeat this comments made by me earlier.
  
  It's a disclaimer that I should posted on this blog from day one. See, I never thought this issue of disclaimer was important, for I thought it was redundant since I do not make any stock recommendation or advice on this blog. Second opinions, yes.
  
  A couple many times I have made open second opinions on stock. However, I have always leave my commentary open to the readers' own interpretation.Anyway do remember this:
  
  Now I do believe that you realise that I am a mere blogger and I am not an investment advisor or any sort.Meaning to say, I offer no one any guarantee card here. There is no 'pink borang to isi' if and when anyone decides to buys or sells any shares based on what I had blogged on.So this is to say, I do not owe anyone anything and neither does the reader owe me anything.

Well perhaps I am lousy at running a business too.

Nevertheless, I would share with you, some of my humble opinion on your comments.

• On the other hand,If commodities price drop , its cost of raw material will drop as well. That translate to lower raw material and better margin.

Yes, the raw material has now dropped however, correct me if I am flawed but I do understand that metallurgical coke prices have dropped too. And so has the demand for it too. So if it was me, I would not dare to make that assumption.

Secondly, I would like to reproduce the following passage from my other posting, More On Sino Hua-Ann:

• I am fortunate enough that a Sahamas forum member posted some interesting links for me. Take a look at this forum posting #61 made, http://sahamas.net/forum5/5799-7.html
  See http://www.custeel.com/
  
  Hong Kong listed China Coal Group Corporation indicated recently that due to strong demand for coke from domestic market, the company’s profit in coke business rose up by around 236% in H1 to RMB726m (USD106m).The company produced about 2.21m tons of coke in H1 of 2008, up by 41% in year-on-year. Coke sales volume was 2.4m tons, up by 8% in year-on-year. Domestic price and export price climbed up by 100% and 117.7% in year-on-year.Huang Jingan, the chairman of China Coking Coal Industry Association, also noted that total profit in Chinese coke producers was RMB12.5bn (USD1.8bn) in H1, up by 200% in year-on-year, according to statistics on key coking producers.However, market analysts believe that due to the slow down of the growth rate of steel output, the demand for coke should be weakened in H2 this year. “Although the price remains high, coke price already begin to drop back,” a coke producer said.

Two massive indicators.

1. Mr. Huang Jiangan noted that the total profit in Chinese coke producers were up 200% in year-on-year. ( Compare this to Huann. Why is Huann performance not the same?)

2. Although the price of coke remains high, the coke price has already begun to drop back.
Is this not a worry?

Now from a business perspective, I would reckon that point no 1 is a huge worry! For example, how come China Coal Group saw so much more profit in its coal business? Why didn't one see this happen with Huann? Why did their performance differ so much?

Well I am running or if I wanted to own a business, surely this is such a massive issue for consideration yes?

I do not know. Maybe I am lousy in business but this is how in my humble opinion I would have asked myself.

• Yes, you can buy cyclical stock (timber, plantation, steel etc)when the commodities is in bull. But how much you have to pay for, rocket high price ?? Or when the newspaper say .. oh ya xxx worth to buy now? revise target price of xxxx upside to XXXX? Js like what happen few month ago when all the steel counter traded at record high price? (If one are thinking of fast money, i guess cyclical stocks is definetely not a good choice.)
  
  Or Rather to buy something when someone are willing to sell you at a ridiculous cheap price keep it and wait for good timing to sell?

Ivan, we all have our own way. Maybe I am lousy but if you think that your method of investing/buying a stock is justifiable, go ahead man. I wish you all the best.

Well for the record, back in May, I made the following comments at Sahamas. http://sahamas.net/forum5/5799-1.html (see posting #2 ). I wasn't convinced then.

And neither was I convinced when Huann was trading around 55 sen.

And neither was I convinced when I replied to your posting when you suggested that Huann was a value stock at 44 sen.

Right now, at this moment of time, I see Huann trading around 31.5 sen.

Sorry I do not mean to gloat or as a friend said goat here but I do hope you understand my point for I do not see the point in me making anymore stance on Huann. The stock is now trading way below since I gave my second opinion on this stock.

And when you think about it, there is always a better tomorrow. One day, all these mess will pass. And one day most stocks will rise again and so will Huann. And I do wish you well.

Worried Over AIA Insurance Policies?

With the rumblings on AIA's holding company, AIG, many are worried about their insurance with AIA.

For example, the following news article was posted two days ago.

• Queue forms at AIA branch at Raffles Place as policy holders seek answers
  By Channel NewsAsia Posted: 16 September 2008 1542 hrs
  
  SINGAPORE: Some Singaporeans are concerned that AIG, one of the world's largest insurers could be the next financial giant to fall after Lehman Brothers.
  
  They have formed a queue at AIA Singapore's customer service centre at Raffles Place.
  
  AIG is the parent of AIA Singapore.
  
  Some long term AIA policy holders told Channel NewsAsia that they wanted to surrender their policies, even though there was a penalty for that.
  
  Some have waited for up to three hours to be attended by staff who have been overwhelmed by requests since the office opened this morning.
  
  Others said they have turned up at the AIA office to find out more.
  
  AIA Singapore has yet to comment.
  
  It has five buildings at Robinson Road, Alexandra, Changi, Tampines and Tanjong Pagar, and has over two million policies in force.
  
  Singapore's Monetary Authority (MAS) has said that AIA Singapore, as a registered insurer, is required to maintain sufficient financial resources to meet all its liabilities to policyholders at all times.
  
  It added that AIA Singapore currently meets these regulatory requirements.
  
  MAS said it has the legislative power to establish the policy owners' protection fund, under the Insurance Act.
  
  However, it said that it is unable to comment on parent company AIG, which is the "ultimate parent" of AIA as it is not regulated by MAS.

Here are couple of interesting postings which should help one understand better.

1. Why AIG matters to you

This article is good for it explains things in a rather simplistic but yet precise manner.

• I have insurance through AIG. How worried should I be about the problems at the company?
  
  At least in the short term, you probably don't need to be worried at all. The problems are with the AIG holding company, not the individual insurance company subsidiaries that you do business with, according to a source with New York State's insurance regulator.
  
  Even if AIG's holding company is forced to file for bankruptcy court protection, there's a good chance that the subsidiaries will continue to operate normally with no disruption in claims payments. That has happened in the case of other insurance holding companies' bankruptcies in the past, such as Conseco (CNO).
  
  What guarantees that my claims will be paid?
  
  Typically, if an insurance company falls into financial distress and is at risk of having claims that exceed the assets it holds to make those payments, the insurance regulator in its home state will take control of the firm and make payments.
  
  The state regulator will not only use the firm's own assets to make those payments but, if necessary, can also make payments out of a state fund into which all insurers in the state are required to pay.
  
  This guarantee applies not just to traditional insurance policies but also to retirement products that have a promised payout, such as annuities.
  
  But there are limits to the payments that will be made to customers that vary depending on which state a particular AIG subsidiary is based, according to Joseph Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum, a newsletter often critical of the industry.
  
  Should I be thinking about changing my policy away from AIG to another insurer?
  
  While credit rating agencies downgraded debt held by AIG (AIG, Fortune 500) on Monday, AIG's ratings are still considered investment grade and the company's insurance subsidiaries are considered to be secure, at least for now.
  
  Belth said changing insurers is not a simple decision.
  
  "A lot depends on what kind of insurance you talk about," he said. "If you're talking about life insurance, you have to think about whether you can qualify with a new insurer, if your health has changed. But it's something you have to consider if the ratings decline into the vulnerable range."
  
  Why should I care about problems at AIG if I'm not a customer?
  
  AIG is by far the world's largest insurer and its stock is found in many mutual funds, including any S&P 500 index fund. It is also a component of the Dow Jones industrial average. All by itself, it's been responsible for dragging the Dow down more than 400 points so far this year.
  
  AIG is also active in the business of credit default swaps, complicated financial instruments used by investors to protect themselves from bond defaults. Lehman Brothers (LEH, Fortune 500) was another major player in that field. If both go away, it would create a tighter credit market for consumers and businesses trying to get loans.
  
  AIG is an insurer, not a lender. Why do I keep hearing about its problems with subprime mortgages?
  
  All insurers take money they collect in premiums and invest them in different forms of assets. The idea is to make money on those investments so that the insurer can keep their premiums low and attract more clients.
  
  But AIG made a bigger investment into securities that were backed by subprime mortgages than most other insurers. As defaults and foreclosures of those loans rose, the value of those securities fell, creating big problems for the firm.
  
  In the past nine months, AIG has reported net losses of more than $18 billion, largely due to its exposure to bad mortgages.

See also States' back-up plans protect life, auto, homeowner policyholders

On the Malaysian front, AIA: Local ops strong, well capitalised

• "We are a locally incorporated insurer, with more than 96 per cent of our total assets invested in Malaysia," AIA chief executive officer Khor Hock Seng said in a statement yesterday.
  
  AIA has a long history in Malaysia and is one of the largest insurers in the country.
  
  Khor said that insurance policies underwritten by the company were direct obligations of its regulated business and subjected to local regulatory and capital requirements under Bank Negara Malaysia's Insurance Act and Regulations.
  
  He said AIA was well capitalised and maintained separate reserves in Malaysia in line with the regulations to meet obligations to policyholders.

And AIA: Turmoil in US will not hurt Malaysian ops

• Meanwhile, Bank Negara, when asked if it would scrutinise the disbursement of loans of AIA and other financial institutions, said it would “closely monitor all financial institutions under our purview and would take all the necessary actions to maintain the stability of our banking and insurance industry”.
  
  AIA started operations in Malaysia in 1948 and had grown rapidly over the past 60 years. Currently, it has 23 branches nationwide, supported by over 8,000 agents serving more than 1.5 million policyholders.

An interesting forum thread on Wallstraits: AIA

George Soros Reckons Crisis Could Worsen!

And to make it complete Financier Soros warns crisis will only get worse

• LONDON (AFP) — US financier George Soros warned in a television interview Tuesday that the turmoil in the financial markets was far from over, with Britain likely to be the economy most badly hit by the crisis.
  
  As Wall Street braced for the potential collapse of insurance giant AIG, the hedge fund pioneer told the BBC that the wisdom of letting Lehman Brothers go to the wall at the weekend would only be revealed with hindsight.
  
  "I'm afraid we are not through it at all -- in some ways we are still heading into the storm rather than heading out of it," he said.
  
  Asked whether the US government should have rescued Lehman investment bank, he said: "If the financial system survives then it was the right thing to do to let them go bust. If there is a meltdown then obviously it wasn't."
  
  "Saving the system trumps moral hazard. In the end you do whatever it takes to save the system," he added.
  
  However, he said the way US Treasury Secretary Henry Paulson was handling the situation was "very reminiscent of the way the central bankers talked in the 1930s", the time of the Great Depression.
  
  Soros said Britain's reliance on the financial industry make it especially vulnerable.
  
  "The financial industry is a major segment of the British economy and that's why I think Britain is more heavily hit by this financial crisis than most other economies," he said.
  
  More generally, he warned finance had "grown too big, it has taken up too big a share of the world's resources. Now it is shaking and I think when it becomes once again regulated it will be less profitable".
  

Jim Rogers Calls Them Simply Incompetent!

Jim Rogers has some nasty opinions.. Incompetent people forced Lehman collapse:Rogers

• SINGAPORE: Global markets are in turmoil thanks to the unprecedented crisis brought about by the collapse of global financial giant Lehman Brothers and the bail outs of Merrill Lynch and AIG.
  
  But who is responsible for the fall of these banking giants? A set of incompetent people with Lehman Brothers, Merrill Lynch and AIG, says global investing legend Jim Rogers.
  
  In an exclusive interview to Commodity Online, Rogers—who is regarded as one of the top global commodities investors—said that "gigantic amounts of leverage caused by a few totally incompetent people within the firms" have led to the collapse of Lehman Brothers and problems plaguing Merrill Lynch and AIG.
  
  Rogers said investment firms like Lehman used to invest heavily on commodities and as the funds have moved out of commodities, it has hit the markets hard.
  
  ”Commodities and everything else are being sold in forced liquidations because of the financial situations at many firms,” Rogers said.
  
  He predicted that the US economy in particular and the economies in several countries across the globe will continue to suffer thanks to the crisis. “After this panic and forced liquidations, the economies will continue to worsen, but the sound investments will recover first after the panic,” Rogers added.
  

Marc Faber Latest Views On Commodities, US Dollar And Emerging Markets

Still keeping faith, like Jim Rogers ( see Crude Oil Bubble Burst? Commodities Guru Jim Rogers Is Still Keeping The Faith! ), that the commodities will bounce back?

Here's an interesting article on what Dr. Marc Faber has to say. New highs in commodities won't happen anytime soon, says Marc Faber

• INTERNATIONAL. Marc Faber, Editor and Publisher of 'The Gloom, Boom & Doom Report’ feels that commodities may not see a new high for many years.
  
  In an exclusive interview for India's CNBC-TV18, Faber said: "We had a contraction of global liquidity ongoing for over a year and not everything falls at the same time. So as equities began to decline last November, commodities still continued to rise and dollar continued to fall. Now commodities and material stocks like steel companies have started to come down. It is like a domino where one asset class tumbles after the other.
  
  Over the last six weeks or so, the dollar has been very strong and commodities have been weakening including gold. Some foreign currencies have been very weak like the New Zealand dollar, Australian dollar, euro, pound sterling. Now the dollar is overbought, the S&P 500 and commodities are oversold and we can have a counter trend rally. In other words, the S&P 500 can recover 100-points or so and the dollar could correct here from 1.40 against the euro to 1.50. The pound could rebound the Australian dollar, New Zealand dollar. At the same time, we can have rally in commodities but new highs in commodities won’t happen anytime soon.
  
  The contraction of liquidity in the world will continue. We will need a base building period around this level before we start recovering in asset markets or at worst we will have another major slide in 2009, 2010."
  
  "The S&P 500 could recover 100 points," Faber said. The dollar may correct from here, he feels. It could correct from 1.40 to 1.50 against the euro, he said.
  
  According to Faber, new highs in commodities are unlikely anytime soon.
  
  One needs to see base building before asset markets recover. The market seems to have discounted recession, Faber added.
  Reflecting on the link between the dollar and commodities, Faber said: "It is not the dollar that moves commodities but commodity prices move the dollar. I am not saying that the dollar isn’t going to move higher over the next six-nine months. That could be the case if global liquidity tightens and if US trade and current account deficit contract then you will have dollar strengths for the next six-nine months. For the next ten days, US dollar will weaken."
  
  Asked about his opinion of India's future, Faber said: "When index in India went to over 20,000, we clearly had a bubble and strong earnings. That is de-accelerating but this is not the view of the managers who manage India funds, they are all very bullish. So, this is my view but prices are quite vulnerable on the downside in all emerging markets."
  

The Denial Issue On Wall Street

Here's one worth reading article posted on New York Times. On Wall St. as on Main St., a Problem of Denial

• September 16, 2008
  Talking Business
  On Wall St. as on Main St., a Problem of Denial
  By JOE NOCERA
  
  How can this be happening?
  
  How can it even be possible that we wake up on a Monday morning to discover that Lehman Brothers, a firm founded in 1850, a firm that has survived the Great Depression and every market trauma before and since, is suddenly bankrupt? That Merrill Lynch, the “Thundering Herd,” is sold to Bank of America the same weekend?
  
  Just months ago, Lehman assured investors that it had enough liquidity to weather the crisis, while Merrill raised some $15 billion over the last year to shore up its balance sheet. Now they’re both as good as gone.
  
  Last week, it was Fannie Mae and Freddie Mac that needed a government bailout. This week, it looks as though American International Group and Washington Mutual will be on the hot seat. We have actually reached the point where there are now only two independent investment banks left: Goldman Sachs and Morgan Stanley. It boggles the mind.
  
  But it really shouldn’t. Because after you get past the mind-numbing complexity of the derivatives that are at the heart of the current crisis, what’s going on is something we are all familiar with: denial.
  
  Indeed, it is not all that different from what is going on in neighborhoods all over the country. Just as homeowners took out big loans and stretched themselves on the assumption that their chief asset — their home — could only go up, so did Wall Street firms borrow tens of billions of dollars to make subprime mortgage bets on the assumption that they were a sure thing.
  
  But housing prices did drop eventually. And when people tried to sell their homes in this newly depressed market, many of them had a hard time admitting that their home wasn’t worth what they had thought it was. Their judgment has been naturally clouded by their love for their house, how much money they put into it and how much more it was worth a year ago. And even when they did drop their selling price, it never quite matched the reality of the marketplace. They’ve been in denial.
  
  That is exactly what is happening on Wall Street. Ever since the crisis took hold last summer, most of the big firms have been a day late and dollar short in admitting that their once triple-A rated mortgage-backed securities just weren’t worth very much. And, one by one, it is killing them.
  
  Take Richard Fuld, the chief executive of Lehman Brothers. Last summer, as the credit crisis first gripped Wall Street, Mr. Fuld’s firm, which was fundamentally a bond-trading firm, concluded that the problems would be short-lived — and that those firms willing to take big risks would be the ones that would reap the big rewards once things calmed down. So Lehman doubled down on mortgage-backed derivatives — not unlike a Florida condo owner buying a second one to flip 18 months ago.
  
  Big mistake. Ever since then, Lehman has had a terrible time admitting the magnitude of its mistake — or properly pricing its securities. As mortgage derivatives became increasingly toxic, they also became increasingly illiquid. So firms were left to set their own “mark-to-market” price. And just like so many homeowners, they kept pricing their securities higher than they should have.
  
  Earlier this year, for instance, when the hedge fund manager David Einhorn was making his public case against Lehman (he now refuses to talk about the firm), he stressed his belief that Lehman was valuing its securities too high. He turned out to be exactly right.
  
  Every time the market was roiled — especially after the Bear Stearns collapse — every firm on Wall Street had to re-mark their securities to reflect the new reality. That’s why you saw firms taking billion-dollar write-off after billion-dollar write-off, long after they thought they had taken care of the problem. And it is also why the write-offs will continue now that Lehman is bankrupt.
  
  “Selling begets more selling,” said Sean Egan of the independent bond-rating firm Egan-Jones. And yet, even as they lowered the value of their mortgage-backed securities, firms like Lehman had still priced them too high. Back when he was talking publicly about Lehman, Mr. Einhorn used to cast Lehman’s mark-to-market pricing as an act of dishonesty. I tend to think it was more like wishful thinking. Either way, the result was the same.
  
  A week ago, even as the government was bailing out Fannie and Freddie, Mr. Fuld went off to seek new capital — something Lehman desperately needed to shore up its decimated balance sheet — from the Korea Development Bank. Why did those talks break down? Because Mr. Fuld wanted more for Lehman than the Koreans thought it was worth. He simply couldn’t face the reality that his firm wasn’t worth what he thought it was.
  
  Now look at his next-door neighbor, John Thain at Merrill Lynch. To be sure, Mr. Thain owned a better house — although Merrill Lynch also had billions in toxic securities, its bread-and-butter is its brokerage arm. It is fundamentally a gatherer of assets, not a bond-trader.
  
  But there is another big difference between the firms. Unlike Mr. Fuld, who had run Lehman since 1993 and is the architect of the modern Lehman, Mr. Thain had been at Merrill Lynch just since December, when he was brought in to stanch the bleeding. He didn’t have the same pride of ownership in Merrill that Mr. Fuld had in Lehman. That is why he was willing to sell $31 billion worth of mortgage-backed derivatives for 22 cents on the dollar in late July — far lower than many firms had been pricing those securities.
  
  And that is also why, seeing what had happened to Bear Stearns, Fannie and Freddie, and Lehman Brothers, he took the pre-emptive step of selling Merrill Lynch to Bank of America. In the process, he got $50 billion for Merrill’s shareholders. True, that was half of what Merrill was worth a year ago, and a once-proud name is about to be swallowed up by a commercial bank. But he also got $50 billion more than Mr. Fuld got for his shareholders — and being sold is a lot better than being liquidated.
  
  It is unlikely that the worst is over. The market Monday dropped more than 500 points, and the government is now trying to keep A.I.G. from going the way of Lehman Brothers, even asking Goldman Sachs and JPMorgan to make some $75 billion in loans available to the struggling insurance giant. And then there’s Washington Mutual. And then ... well, who knows where it will end?
  
  Clearly the government is no longer willing to put the taxpayers’ money at risk to save firms that took on too much risk buying securities that they didn’t understand. As painful as it is to see Lehman employees lose their jobs, that is probably a good thing. That is the final parallel that exists between the housing market and Wall Street: the issue of moral hazard.
  
  For over a year now, many Wall Streeters have complained about government efforts to forestall foreclosures, saying that it would create the expectation that everyone should be bailed out, and that consequently no one would learn important lessons about the dangers of taking more risk than they could handle. Besides, they added, the housing market was never going to improve until housing prices found their natural bottom. And that wouldn’t happen until the government stopped trying to prop up housing prices.
  
  But in truth, you can say the same of Wall Street — it won’t learn any lessons, either, until firms that took foolhardy risks start to fail. One reason Lehman could not find a buyer over the weekend is because potential buyers were insisting on the same kind of taxpayer guarantees that the government had given JPMorgan when it bought Bear Stearns, or when it took over Fannie and Freddie. That’s the essence of moral hazard. When Treasury Secretary Henry Paulson refused to do so, the potential buyers went away.
  
  With the government refusing to prop up Wall Street anymore, maybe now mortgage-backed derivatives will find their natural bottom. Something to look forward to, I guess.
  
  

Markets In Crisis: Is The End or Is The Beginning Of the End?

So the markets plunged pretty badly yesterday.

CNN had it as Stocks get pummeled

• "It was an ugly day," said James King, president and chief investment officer at National Penn Investors Trust Company. "Lehman's failure to find a suitor and Merrill deciding to cash in their chips before a similar fate could befall them really stoked the fears of the public."
  
  AIG exacerbated those fears in the afternoon. And all the bad news isn't out there yet, King said. "Investor confidence is at the lowest point we've seen in a while."

The Wall Straits Journal explained what has happened. Lehman Files for Bankruptcy, Merrill Sold, AIG Seeks Cash

• The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers. Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. Barclays said Monday it pulled out of the potential deal after deciding it wasn't in the best interest of shareholders.
  
  Early Monday morning, Lehman filed for protection under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. Lehman said none of the broker-dealer subsidiaries or other subsidiaries of LBHI will be included in the Chapter 11 filing and all of the broker-dealers will continue to operate. Customers of Lehman Brothers, including customers of its wholly owned subsidiary, Neuberger Berman Holdings LLC, may continue to trade or take other actions with respect to their accounts, Lehman said.
  
  

Of course the Feds did try to calm the markets down. Fed adds most cash since Sept. 2001 to calm markets

• The New York Fed added $70 billion in overnight repurchase agreements, known as repos. The central bank does a repo operation on almost every business day, but offered an unusually high amount today in light of the demand for reserves from banks and primary dealers.
• The Fed adds reserves to the system in order to keep overnight lending rates near its target, currently 2%. The actual rate at which banks were trading fed funds Monday rose to at least 7% at one point, the widest spread over the target rate in at least 20 years, according to Tony Crescenzi, chief bond strategist at Miller Tabak & Co.
  
  The actual rate declined to 4% after the Fed's second reserve operation of $50 billion, the largest since seven years ago, when the central bank was trying to ensure markets could re-open for business.
  
  The rate being so much above the Fed's target "shows that demand for excess reserves is extraordinary," said Ray Stone, chief economist and co-founder of Stone & McCarthy Research.
  
  Money markets have effectively frozen up today because managers don't want to expose themselves to dealers in light of Lehman's bankruptcy, he said. So they're turning to banks to invest their short-term funds, but everyone offering overnight funds is demanding a higher rate to lend it.
  "I've been through many financial crises and this is all new to me," said Stone, who worked at the Fed in the 1970s.
• Interest-rate futures jumped as traders see a 69% chance the Federal Reserve will reduce its benchmark rate at its meeting Tuesday to 1.75% from 2.00% to make borrowing and lending more feasible for a battered financial system.
  
  "We believe that the gravity of the situation requires a Fed ease of 50 basis points and a removal of the current 25 basis point premium of the discount rate" at which banks can borrow from the Fed directly, said T.J. Marta, income strategist at RBC Capital Markets. "Such a move would put the Fed 'ahead' of the market."
  
  Futures show a better chance, 84%, of that quarter percentage point cut taking place at the Fed's meeting Oct. 31.

FT.Com was more direct by calling it as World’s biggest banks join forces.

And FinancialSense market commentator was simply amazed and describes it as Disconnection: The US Financial System Morphs Into Wonderland in his market wrap editorial today.

Here's part of his long write. (ps. I had described the dollar as flying without wings on a chatbox. - Mr. Allison calls it as without fundamental legs to stand on. :D )

• The dollar, without fundamental legs to stand on, has vaulted higher in near vertical fashion, wreaking havoc on all commodity-based assets around the world. The Fed has been forced to lend out nearly 60% of its balance sheet to keep the banks solvent. The US trade deficit is on track to be over $800 billion this year and the budget deficit could soar to $500 billion, counting small off-budget items such as the Iraq War. The credit crisis is exploding on Wall Street, while Main Street deals with a deepening recession. However in Wonderland, the dollar presses ever higher.
  
  Precious metals conundrum
  
  Physical gold and silver have grown scarce among dealers around the globe. Delivery delays and high premiums are common, from New York to London, from Dubai to Mumbai. According to Swiss bank UBS, the world’s largest gold bullion trader, “Physical demand continues at a record pace.” At the very same time, the paper prices of gold and silver have plunged, along with the stocks of the entire gold and silver mining industry. UBS notes that “huge liquidation of long positions on the Comex and OTC markets have been the major reason for the fall in gold prices.” Customers world-wide are paying large premiums for an asset that has been plunging in price. Extremely curious.
  
  Hurricanes in the Gulf no problem for oil prices?
  
  Last Friday, Hurricane Ike barreled into the Gulf of Mexico, a massive storm 600 miles across and headed for offshore oil rigs and large refineries along the Texas coast. During the day the price of oil drifted lower, ending at just over $100 per barrel. According to Reuters, fifteen U.S. oil refineries with a total capacity of 3.861 million barrels per day are now shut down in the aftermath of Hurricane Ike, the U.S. Department of Energy said on Sunday. In addition, 30 major natural gas processing plants with a total capacity of 14.55 billion cubic feet per day are closed in the Gulf of Mexico, including plants still impacted by Hurricane Gustav.
  
  Many rigs will need weeks, in some cases months, to get back to full production. On Monday, oil continued to drop after refineries escaped with less damage than expected, ending the day around $94.00 a barrel. If heavy damage was expected on Friday, why did the price of oil not launch higher in Friday trading?
  
  Perception becomes reality
  
  Senior Energy Analyst Charles Maxwell at Weeden & Co was recently quoted in Barron’s. Maxwell, 76 years old, was asked about the expectation that oil was heading for $75 a barrel. “It is the perception that really is changing, not the true value of oil throughout the system. The perception change involves whether we are going to move into an era where oil supplies will be generous and easy to find, and therefore relatively cheap - or whether those supplies are going to be closed off for both political and geological reasons.” Maxwell, a veteran analyst since the 1960’s, thinks oil is heading for $300 a barrel. For the short term, perception becomes reality.
  
  "In these most troubling of times, oil does not appear to make the cut as a safe enough haven," said John Kilduff, an analyst at MF Global, in a research note. So the US dollar has become the perfect safe haven for these “troubling times.” Even the White Rabbit himself would find this most curious.
  
  Black is white, Up is down
  
  As Fannie Mae and Freddie Mac are nationalized and become wards of the state (at a cost of $300 billion or more), the Federal government's balance sheet takes on another 5 trillion dollars in debt. This is apparently great news, as the dollar continues to move up dramatically. The markets must believe this and other bailouts to come must be good for the dollar. However, without foreign capital flowing into our Treasury in much larger amounts, how will the government pay for all this largess (and the largess yet to come) short of printing massive amounts of dollars? For the moment, who cares, when up is down and black is white?
  
  The Grand Plan in Wonderland
  
  Even in Wonderland there is a method to this madness. Some have theorized that the Grand Plan, hatched by Treasury Secretary Paulson and Fed Chairman Bernanke, was to use the excessive leverage in the hedge fund sector and force a massive de-leveraging, crushing the commodity sector, boosting the dollar and taking the pressure off the financial sector. A key benefit was to lower the cost of gasoline to hard-pressed consumers just before the election. The plan has seemingly worked very well, however it is likely just a “holding action.” And when the hedge funds have de-leveraged and dumped their commodity positions, what next? It would seem the wildly oversold commodity sector may just rebound, perhaps violently after the de-leveraging ends. Timing is everything, and Paulson and friends just want to hold off the cracks in the dike for another six weeks.
  
  The part of the plan about taking pressure off the financial sector hasn’t worked out quite as well. With the dollar soaring and commodities plunging, the financial sector has continued in its primary trend, falling off a cliff.
  
  Wall Street implodes
  
  This past weekend, the Federal Reserve and Paulson frantically attempted to broker a deal to rescue Lehman Brothers, the 158 year old investment bank that was established before the Civil War. There were no takers. Lehman is basically insolvent due to its massive losses associated with its toxic real estate derivatives. This once-proud institution has been forced to file for bankruptcy. In a brief fit of good judgment, Paulson decided not to bail out Lehman by adding further public funds to the hundreds of billions already pledged.
  
  When Bank of America passed on buying Lehman Brothers, Paulson and company pushed B of A to buy Merrill Lynch, another financial giant on the edge of bankruptcy. Curiously, Bank of America, after a few hours of due diligence, decided to overpay and buy Merrill for $29 per share, a 70% premium over the $17.05 close last Friday. When asked why he didn’t wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated “the strategic opportunity was so compelling it couldn’t wait.” Bank of America must now digest both Countrywide Financial and Merrill Lynch, while dealing with the challenges of its own balance sheet. The billions of dollars of toxic sludge that Merrill carries on its books now becomes B of A’s problem. Whatever happened to prudent banking? Just how hard did Paulson twist their arm? Perhaps Paulson would just like a weekend off once in a while.
  
  Trillions in liquidity evaporate
  
  As Merrill is swallowed, Washington Mutual, Wachovia and AIG are on cliff’s edge, ready for their turn to take the plunge. It is likely the veteran bankers in the Big Apple have never faced anything this bizarre in their careers. Two trillion dollars in liquidity has exited the US financial system this year, and three trillion world-wide. Without this vital lubrication, how does this system keep chugging ahead? The financial system has disconnected. It is ugly out there and likely to get uglier. Welcome to Wonderland.

And the downgrade on AIG is not helping either! AIG downgrade could prove costly

• NEW YORK (CNNMoney.com) -- The pressure on troubled insurer American International Group intensified Monday night as a credit rating agency downgraded the firm.
  
  Another cut could prove very costly to AIG, which is scrambling to raise much-needed capital.
  
  Fitch Rating downgraded AIG to A, from AA-, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.
  
  The company could be required to post $10.5 billion of additional collateral if it is downgraded one notch by one of the other major rating agencies and $13.3 billion of collateral if downgraded by both, Fitch said in a statement, citing AIG's July 31 estimates.
  
  Standard & Poor's late Friday warned it might downgrade AIG, placing the company on CreditWatch negative.
  
  Hoping to avoid such downgrades, state and federal officials raced Monday to help the insurer gain access to much needed cash. Credit downgrades could doom its business.
  
  New York State gave the nation's largest insurer the power to transfer $20 billion in assets from its subsidiaries to use as collateral for daily operations, said Gov. David Patterson. In exchange, the parent company will give the subsidiaries less-liquid assets.
  
  "It is simply giving AIG (AIG, Fortune 500) in effect the ability to provide a bridge loan to itself," said Paterson, stressing the company is financially sound and that no taxpayer dollars are involved.
  
  Meanwhile, the Federal Reserve asked Goldman Sachs (GS, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) to make $70 billion to $75 billion in loans available to AIG, the Wall Street Journal reported.
  
  However, any discussions are very preliminary, a source close to the matter told CNNMoney.com.
  

So gloomy?

Here's two quotes posted on Kirk's.

• "When stocks pull back to their lows of the year -- in some cases, multiyear lows -- people avoid them like the plague. I don't get how it's different from a sale at Macy's. I mean, you don't see shoppers running away from sales when prices are marked down 50%, right? So what's the difference?" - Harry Schiller
• "One of the many paradoxes of the stock market is that the worse it gets, the better it gets – at least, for those still able to invest." - Brett Arends
  

According to CNBC, Lehman Plans To File For Bankruptcy

Yes, according to CNBC, Lehman has confirmed that it will file for Bankruptcy!

• CNBC has confirmed press reports that Lehman Brothers is likely to file for bankruptcy protection as soon as Sunday evening.
  
  Among details to be worked out: the accounting treatment for certain derivatives and repurchase positions, an area not currently covered by bankruptcy laws; and the orderly netting out of a variety of securities positions to which Lehman Brothers is contractually obligated.
  
  Federal authorities are expected to be involved in the orderly disposition of Lehman assets if such a filing occurs. Sources knowledgeable about the weekend deliberations tell CNBC that without some government participation in the process, a bankruptcy filing by Lehman Brothers would cause major disruptions in the financial system.
  
  Officials at the Federal Reserve and U.S. Treasury are taking steps to mitigate risk to the system and assure the orderly functioning of the markets tomorrow.
  
  According to the New York Times, Lehman will seek to place its parent company, Lehman Brothers Holdings, into bankruptcy protection, while its subsidiaries will remain solvent while the firm liquidates its holdings.
  
  A consortium of banks will provide a financial backstop to help provide an orderly winding down of the 158-year-old investment bank. And the Federal Reserve has agreed to accept lower-quality assets in return for loans from the government, the New York Times says.
  
  It is not clear whether the government would appoint a trustee to supervise Lehman’s liquidation, or how big the financial backstop would be.
  
  Lehman's fate seem sealed after Barclays walked away from a deal to purchase the troubled Wall Street investment bank — brokers Sunday afternoon were streaming into their offices and a special trading session for credit default swaps was called.

Source: http://www.cnbc.com/id/26708143

John Mauldin on US Housing: Are We Near The Bottom Yet?

In this week's newsletter, John writes the following Housing: Are We at the Bottom?

• Housing: Are We at the Bottom?
  
  The short answer is no, but let's look at the data from one of the most knowledgeable sources on that topic. John Burns of John Burns Real Estate Consulting consults with over 2000 of the largest banks and homebuilders in the country (his client list is a who's who of banks, builders, and hedge funds). He has a reputation for solid research and pulling no punches. Some of his hedge fund clients were the ones you read about who made billions. (He wishes he had negotiated a percentage!) He is deeply involved in analyzing trends in the housing market. His web site is http://www.realestateconsulting.com/. He has graciously sent me the executive summary of his latest posting (a 27-page executive summary) that we will be looking at for the next few pages.
  
  Let's start with a quote from John at the beginning of his report: "The prospects for the U.S. housing market have changed for the worse. It has become increasingly clear that the U.S. economy is on the brink of recession, as overall job growth has slowed to zero and retailers are reporting abysmal results. New home sales, traffic and pricing are all heading down according to the results of our survey of over 300 builder executives. Resale [existing home] sales are starting to plateau in some markets, but pricing continues to fall as distressed sales dominate the market. The new housing bill will help in some ways, but will first serve a devastating blow to homebuilders, with the elimination of seller-funded down payment assistance, which accounts for 17% of new home demand by one estimate."
  
  How far along are we? Burns thinks that home prices will drop by 22%, 12% of which has already occurred. His analysis differs from that of the Case-Shiller Indices, which suggests a much steeper decline. Note in the graph below that the Case-Shiller Index shows home prices rising more than does Burns' work. Part of it is different methodology and part of it is that the CS index focuses on major markets and Burns' work is more broadly based.

Not forgetting the Alt-A!!!

• Alt-A is the New Subprime
  
  By now, everyone in the world is aware of how bad the subprime mortgage business was. But now it is time to get ready to hear the same tale, told again, about Alt-A mortgages. These are mortgages made to borrowers with better credit scores than subprime borrowers, but who could not or decided not to document their income. One estimate is that 70% of Alt-A borrowers may have exaggerated their incomes (Wholesale Access). More than half of those were people who exaggerated their incomes by 50% or more! (Mortgage Asset Research Institute)
  
  How much are we talking about? Around 3 million US borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding. $400 billion of that was sold in 2006. Almost 16% of securitized Alt-A loans issued since January 2006 are at least 60 days late. Many of these loans (around $270 billion) were interest-only or with a low teaser rate, and the resets were at 3- and 5-year lengths. These are called Option ARMs. That means starting next year we are going to see a wave of mortgages resetting to new rates. And it is no modest increase. Rates can jump 4-8% or more from teaser rates. Some Option ARMs are resetting at 12.25%. That can double a payment.
  
  Wachovia and Washington Mutual were big sellers of Alt-A loans, and had $122 billion and $53 billion, respectively, on their books at the end of the second quarter. Is it any wonder their stocks are under pressure? That is why it is so hard to quantify how many more write-offs there will be. You don't write down a mortgage until it starts to develop problems. These problems may not show up for a few years. I continue to stress I do not want to own a financial stock that has exposure to mortgage paper. Write-downs are going to continue to come for a long time.
  
  This means there will be a steady wave of foreclosures for the next two years in communities all over the US. As long as these homes keep coming onto the market, they are going to exert downward pressure on prices. Foreclosure sales are up by 109 from this time last year.

Read the rest of his write-up here

Here's a tip, do subscribe to his newsletter! http://www.frontlinethoughts.com/subscribe.asp

Understanding What Needs To Pan Out..

Written by Brian Pretti on FinancialSense.com market wrap, Fun With Funding

• ...You know that for some time now we have been preaching about what we believe to be one of the most important macro themes of the moment that is deleveraging. Important both for financial market and real world economic outcomes ahead. And, whether we like it or not, it's a theme that we believe will be with us for a good while to come. The ultimate contraction of balance sheets in the financial, household and corporate sectors will be a process, not an event, with plenty of volatility along the way. For those attempting to call interim bottoms with respect to this phenomenon as we travel along this path, as we have already seen this year and will undoubtedly continue to see again, our only comment is good luck. In the much larger picture, it was this very multi-decade expansion of private sector balance sheets in aggregate that in large measure drove corporate profits over the longer cycle. So now that deleveraging and balance sheet shrinkage is destined to play out ahead, all as part of the natural progression of a longer term credit market cycle, the trajectory or rate of change in corporate profit growth is in question. A major issue for the financial markets, especially equities. We believe the markets are just starting to wake up to this long cycle thematic realization... do read the rest here

Another View On Why Commodities Are Plunging

Blogged the other day: Conspiracy On How The Commodities Markets Were Rigged!

The GlobeAndMail carried the report on what Donald Coxe is saying, The real reason commodities are tumbling

• “This has done more damage to my personal wealth than anything in the last 20 years,” he said in an interview yesterday. But he has too much respect for how the U.S. authorities engineered the collapse in commodities – a move he said was necessary to shore up the global financial system – to be bitter.
  
  “My attitude is, goddamn it, they're good … it was brilliant.”
  
  To understand why commodities are plunging now – the S&P/TSX plummeted another 488 points yesterday – you have to go back to mid-July, when the U.S. Federal Reserve and Treasury first announced steps to support mortgage giants Fannie Mae and Freddie Mac.
  
  The move, which ultimately led to the Treasury taking control of Fannie and Freddie this week, touched off a chain-reaction of market events that culminated with the wrenching decline in commodities.
  
  According to Mr. Coxe, the Fed's ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets. To accomplish this, the decision to support Fannie and Freddie was deliberately announced on a Sunday, which had the effect of maximizing the reaction from thinly traded financial stocks on overseas markets.
  
  Because many hedge funds were using massive leverage to short financials and go long on commodities, when North American markets opened and banks initially rallied, the funds were forced to cover their short positions.
  
  At the same time, the U.S. dollar was rallying because the risk of holding Fannie and Freddie paper had diminished. The rising dollar, in turn, made commodities less attractive, giving funds that were already scrambling to cover their financial shorts another reason to dump oil, grains and other commodities.
  
  The losses were swift and dramatic. On the Friday before the July 11 announcement, crude oil closed at $145.18 a barrel. Over the following five days, it plunged 11 per cent. “Leverage was being unwound dramatically,” Mr. Coxe said on a conference call last week. “We had a true panic.”
  
  As oil and other commodities were tumbling, fears about the slowing global economy were mounting, giving resources another push downhill. This was also in keeping with the Fed's wishes, because lower commodity prices would help quell fears about inflation.
  
  Mr. Coxe has no proof that the Fed and Treasury acted in concert to boost financials and sink commodities. He is basing his assertions on conversations with hedge fund managers and on years of watching financial markets. “There's no doubt whatever in my mind” about what happened, he says.
  
  The future is less certain, however. Now that Freddie and Fannie have been nationalized, the credit crisis is still very much alive and financial stocks are looking as shaky as ever. As for commodities, once the current storm passes, Mr. Coxe is confident they will recover.

On today's Financialsense.com market wrap, market commentator, Michael Shedlock made a rebuttal on Coxe's claims on his editorial, Commodity Bulls Jump the Shark

• While it is true the Treasury is guilty of blatant manipulation when it comes to the bailout of Fannie Mae and Freddie Mac, the dollar did not rise nor did oil or commodities drop because of it.
  
  Let's take a look at charts of the US dollar and crude in the aforementioned five days around July 11 when crude started to plunge.
  

  
  
  
  
  The chart clearly shows that crude started to plunge long before the dollar rally. Right off the bat we can clearly see Coxe is off on his timeframe in regards to action on the US dollar.
  
  Furthermore, the odds of a Fannie Mae bailout causing crude to plunge immediately but the dollar to stay flat for two weeks then soar are virtually zero.
  
  Yes, Coxe is correct that Paulson wanted to ignite a rally in financials, but when it comes to Fannie Mae (FNM), Washington Mutual (WM), Freddie Mac (FRE), Lehman (LEH), and others, I believe one needs to take a look at actual results before making claims of brilliant execution.
  
  Here are the actual results: Fannie Mae and Freddie Mac are both trading under $1. Lehman is under $4. Washington Mutual touched $1.75. Do "brilliantly executed plans" as Coxe puts it, always succeed so spectacularly? If that's success, pray tell what constitutes failure?
  
  The plain fact of the matter is there were many fundamental reasons for the dollar to rally, and it did. Likewise there were fundamental reasons for Fannie and Freddie to become worthless, and they did, in spite of admittedly massive intervention (manipulation).

Shedlock then continues..

• People will see what they want to see, but the dollar rallied because there was every fundamental reason for it to rally. Was there jawboning by Paulson and Trichet? Of course there was.
  
  However, the market ignored Paulson's jawboning for forever and a day, while Trichet's statements were in regards to a weakening Europe that is now clearly deteriorating rapidly. The dollar was poised to soar on the story of a weakening global economy that was supposed to decouple from the US but failed to do so.
  
  Carry Trade Blows Sky High
  
  A massive unwinding of the carry trade is now fueling the dollar rally. Huge speculation by traders shorting the Yen and going long the Euro, the Pound, the Australian Dollar, and the New Zealand Dollar is being unwound.
  
  Similarly there was massive speculation by traders shorting the dollar and going long the Euro, the Pound, the Australian Dollar, and the New Zealand Dollar. That too is being unwound.
  
  Those sorry bets were made on the misguided belief that Europe, Asia, and especially China would decouple from the US. In other words, massive bets were made that the tail would wag the dog. Now we see how foolish those bets were, especially for the Johnny-Come-Latelies who plowed into the trade just as it was about to reverse.
  
  New Zealand, Australia, Germany, Ireland, Spain, and the UK are in or rapidly sliding towards recession. This is an enormous fundamental factor and very supportive of a strengthening US dollar.
  
  Inquiring minds may wish to read Carry Trade Rout Continues for more details.

Do read rest of Shedlock's artiucle here

Warren Buffett's Current Market Views

Posted on Marketwatch.com, What Does Warren Buffett Think About the Market?

• Super-billionaire Warren Buffett warns that the federal bailout of Fannie Mae and Freddie Mac could end up costing the taxpayers "hundreds of billions of dollars" if the housing market continues to slump. But Mr Buffett, the world's richest man, defended the controversial bailout as necessary nonetheless.
  
  "It all depends on what housing does," he told me from the sidelines of Boston's Fenway Park, where he was appearing to throw out the ceremonial first pitch on Tuesday night. "If housing falls off another 15 or 20%, they're going to lose some real money" on the bailout. (The "they" means "the government," which actually means, "you"). "It could get into the hundreds of billions," he said. But "if housing is close to bottoming, they might not lose much money at all." The federal government stepped in over the weekend to backstop the two home loan giants, putting them into conservatorship and taking over most of the equity. "We'd be crazy not to come a solution on this," Mr Buffett said. Otherwise there would be "$5 trillion... of troubled instruments," on the market, he said, referring to the mortgage giants' liabilities.
  
  Bad news for investors in the two companies. There has been some speculation about what value, if anything, remains for holders of the companies' common and preferred stock. Mr Buffett, arguably the most successful investor in history, thinks: Not much. "They are probably wiping out the common and the preferred," he said.

Older blog posting for reference: Warren Buffett Approves Bailout of Freddie And Fannie

Philip Fisher: When To Sell

From Fisher's book, Common Stock And Uncommon Profits. Chapter 6.

WHEN TO SELL

Fisher is very precise about when to sell. “I believe there are three reasons, and three reasons only, for the sale of any common stock which has been originally selected according to the investment principles already discussed.”

They are:

1.) Upon realizing a mistake,

2.) When a stock no longer meets the 15 points, and

3.) If a substantially attractive investment arises and stock needs to be sold to finance that investment.



Interestingly, Buffett’s commonly told parable about investing in your classmates seems to have originated out of this chapter. Both describe a hypothetical scenario of buying a percentage of the future earnings of a classmate. The point being that we should rationally select people on the basis of their character rather than purely on their intellect. Fisher notes how foolish it would be to sell your lucrative future contract on classmate’s earnings for the sake of buying another, less proven, classmate’s earnings, simply because somebody offered to buy your original classmate investment at a high price.

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do
9. Philip Fisher Articles: Over-Diversification
10. Philip Fisher Articles: Stocks To Avoid
11. Philip Fisher Articles: Competitive Advantage
12. Philip Fisher: More On 15 Checklist When Buying A Stock

Who wants Sino Hua-An?

Ivan's investing diary wrote the following on the posting Regarding Sino Hua-An

• Huaan might not be a growth stock . But at the level of 44 cent now it was a value stocks. Coke price has dropped 20%. However with capacity expantion of another 50% (added 60 to the current of 120) it shld overcome the price dropping issue.
  
  Where you find can find a stock with pe "<" 4 , cash rich, price/nta <1 and attribute dividen of at 20% from its profit every year? It might not be a grow stock. But definetly a value stock to hold for middle long term.

Dear Ivan,

Many thanks for your comments.

Let me share some of my flawed views on Huann yet again.

Regarding Huann as a value stock at 44 sen.

In my humble opinion, yes, every stock will have some sort of value at a given price. However, just how valuable is such 'value'? Here we have a stock that has no growth, which means an average company. Would you agree on this issue? And would buying an average company at a cheap price equates the best investing strategy? I don't know about you but some would prefer to buy an excellent company at a cheap price as a better alternative, yes? And usually excellent company's are companies that are able to earn more and more money each year. Isn't this what we all want if we do own a company? And if so, why should investing be any different?

Now let's look at how average is this Huann. I had made another posting on it, More On Sino Hua-Ann

See the following part.

And let's look at the company's net profit margins.

1) 07 Q4 Revenue 233.375 million. Net Profit 37.442 million. Margin = 16%.
2) 08 Q1 Revenue 290.798 million. Net Profit 35.567 million. Margin = 12.2%.
3) 08 Q2 Revenue 434.426 million. Net Profit 36.916 million. Margin = 8.5%.

How would you interpret such earnings?

Look at the revenue, its sky rocketing but the company has NOT been able to turn the extra, extra revenue into more cash and instead the net margins are deteriorating. From 16% to just 8.5%.

How? How would you evaluate such earnings? Good? Average? or Poor?

Now that would be rather poor yes? The declining margin places a huge question mark over Huann's ability to generate better profits and if you ask me, in an environment where its main product was enjoying a bull run, Huann's performance was terribly poor. Hey, that's my blunt and flawed view on it.

Now regarding PE.

As it is, right now, based on current earnings, most stocks are looking cheap.

That's a fact.

However, for the market, most of the time, the market is only interested in what the stock can earn in the future.

Which means, one has to address the sustainability of Huann's earnings.

Firstly, as listed company here, Huann's earnings track record is simply too little.

And the biggest issue in my opinion is Huann's products itself. It's clearly cyclical and given the fact that most commodities prices have turned south in a dramatic fashion, it's most likely that Huann's products would command a much lower pricing. Is this not possible?

And last but not least, I have to repeat yet again, when Huann's products was in a bull run, Huann's earnings was flat. And if that is the case, if Huann's products turn 'soft', surely Huann's earnings would decline, yes? Is this not possible? And if that would happen, surely Huann's earnings per share would decline. So what appears cheap now in relative to PE, might not appear cheap later if the earnings decline.

Hope my flawed second opinion helps.

Philip Fisher: More On 15 Checklist When Buying A Stock

Blogged previously: Philip Fisher: 15 Checklist When Buying A Stock

Here is another version: http://news.morningstar.com/classroom2/course.asp?docId=145662&page=3&CN=COM

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years? A company seeking a sustained period of spectacular growth must have products that address large and expanding markets.

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited? All markets eventually mature, and to maintain above-average growth over a period of decades, a company must continually develop new products to either expand existing markets or enter new ones.

3. How effective are the company's research-and-development efforts in relation to its size? To develop new products, a company's research-and-development (R&D) effort must be both efficient and effective.

4. Does the company have an above-average sales organization? Fisher wrote that in a competitive environment, few products or services are so compelling that they will sell to their maximum potential without expert merchandising.

5. Does the company have a worthwhile profit margin? Berkshire Hathaway's BRK.B vice-chairman Charlie Munger is fond of saying that if something is not worth doing, it is not worth doing well. Similarly, a company can show tremendous growth, but the growth must bring worthwhile profits to reward investors.

6. What is the company doing to maintain or improve profit margins? Fisher stated, "It is not the profit margin of the past but those of the future that are basically important to the investor." Because inflation increases a company's expenses and competitors will pressure profit margins, you should pay attention to a company's strategy for reducing costs and improving profit margins over the long haul. This is where the moat framework we've spoken about throughout the Investing Classroom series can be a big help.

7. Does the company have outstanding labor and personnel relations? According to Fisher, a company with good labor relations tends to be more profitable than one with mediocre relations because happy employees are likely to be more productive. There is no single yardstick to measure the state of a company's labor relations, but there are a few items investors should investigate. First, companies with good labor relations usually make every effort to settle employee grievances quickly. In addition, a company that makes above-average profits, even while paying above-average wages to its employees is likely to have good labor relations. Finally, investors should pay attention to the attitude of top management toward employees.

8. Does the company have outstanding executive relations? Just as having good employee relations is important, a company must also cultivate the right atmosphere in its executive suite. Fisher noted that in companies where the founding family retains control, family members should not be promoted ahead of more able executives. In addition, executive salaries should be at least in line with industry norms. Salaries should also be reviewed regularly so that merited pay increases are given without having to be demanded.

9. Does the company have depth to its management? As a company continues to grow over a span of decades, it is vital that a deep pool of management talent be properly developed. Fisher warned investors to avoid companies where top management is reluctant to delegate significant authority to lower-level managers.

10. How good are the company's cost analysis and accounting controls? A company cannot deliver outstanding results over the long term if it is unable to closely track costs in each step of its operations. Fisher stated that getting a precise handle on a company's cost analysis is difficult, but an investor can discern which companies are exceptionally deficient--these are the companies to avoid.

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition? Fisher described this point as a catch-all because the "important clues" will vary widely among industries. The skill with which a retailer, like Wal-Mart WMT or Costco COST, handles its merchandising and inventory is of paramount importance. However, in an industry such as insurance, a completely different set of business factors is important. It is critical for an investor to understand which industry factors determine the success of a company and how that company stacks up in relation to its rivals.

12. Does the company have a short-range or long-range outlook in regard to profits? Fisher argued that investors should take a long-range view, and thus should favor companies that take a long-range view on profits. In addition, companies focused on meeting Wall Street's quarterly earnings estimates may forgo beneficial long-term actions if they cause a short-term hit to earnings. Even worse, management may be tempted to make aggressive accounting assumptions in order to report an acceptable quarterly profit number.

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth? As an investor, you should seek companies with sufficient cash or borrowing capacity to fund growth without diluting the interests of its current owners with follow-on equity offerings.

14. Does management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur? Every business, no matter how wonderful, will occasionally face disappointments. Investors should seek out management that reports candidly to shareholders all aspects of the business, good or bad.

15. Does the company have a management of unquestionable integrity? The accounting scandals that led to the bankruptcies of Enron and WorldCom should highlight the importance of investing only with management teams of unquestionable integrity. Investors will be well-served by following Fisher's warning that regardless of how highly a company rates on the other 14 points, "If there is a serious question of the lack of a strong management sense of trusteeship for shareholders, the investor should never seriously consider participating in such an enterprise."

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do
9. Philip Fisher Articles: Over-Diversification
10. Philip Fisher Articles: Stocks To Avoid
11. Philip Fisher Articles: Competitive Advantage

No Privatisation Of Ranhill Now?

Just wondering out loud here.

How come no more Ranhill privatisation stories?

How come?

Ranhill is now 0.705.

Much cheaper to take it private now.

Don't want?

It's much, much cheaper now than 96 sen.

96 sen? That's when them rumours started.




The following postings were blogged recently in July 2008.

1. Ranhill: Our Financial News Being Used To Drive The Stock Higher!
2. Ranhill Answers: Our Financial News Being Used To Drive The Stock Higher!
3. Ranhill Privatisation Rumours: What's Up With The Owner Disposing?

Conspiracy On How The Commodities Markets Were Rigged!

FinancialSense's market commentator, Rob Kirby has a very interesting piece on how the commodities markets were rigged!

1. .. In what many folks might disregard as an unimportant revelation, the Bank of Montreal’s Don Coxe provided in his weekly web-cast to the bank’s institutional and private banking clients, a telling descriptive [transcript available here] of recent market events where he lays out how the Federal Reserve and the U.S. Treasury in conjunction with the CFTC and SEC “RIGGED” the recent collapse in commodities complex and the accompanying bounce in financials to purposely destroy people who were making commodity bets and shorting financials.

Kirby continues..

1. The unintended beauty [sic] of Cox’s words is that they “drip” with nuance illustrating the incestuous relationship between the Federal Reserve / Treasury and one of their favorite private sector agent / provocateurs - Goldman Sachs.
   
   This space has extensively documented the role of both Goldman Sachs [primarily in the investment banking / commodities space] and J.P. Morgan Chase [primarily in the commercial banking / interest rate complex] and their use as “TOOLS” to implement Federal Reserve Monetary Policy via stealth, all the while trying to maintain the illusion of “free markets.”
   
   If my read on these goings-on is only half correct, this grand stage illusion of a charade is about to come to an end.

Read rest of it here: The Stars are Aligning - But For What?

Philip Fisher Articles: Competitive Advantage

Posted on Wallstraits.com before.

FISHER ON COMPETITIVE ADVANTAGE

Philip Fisher is the father of growth investing. He looked to invest in companies with high growth potential, but also looked to buy at reasonable valuations. Even high earnings growth companies fall out of favor, become overlooked or are misunderstood from time to time. Fisher concentrated his considerable talent on finding a select handful of rapidly growing companies at attractive prices, which are rare finds but highly rewarding. As he held these rare gems, he continually tried to refine methods to assess their sustainable competitive advantage that would make them more and more valuable in future years.

A good company will be one with 'certain inherent characteristics that make possible an above-average profitability for as long as can be foreseen into the future'. Fisher looked for companies which consistently succeeded in doing things better than others in the industry. He never forgot to apply the advice of Dr. Dow (of Dow Chemical) to companies: 'If you can't do a thing better than others are doing it, don't do it at all.' Given the inherent risks of holding stocks you should only place money with companies that have both a strong competitive spirit and a strong competitive position.

Companies with high profit margins attract attention from other companies that start to regard that market segment as an 'open jar of honey owned by the prospering company. The money will inevitably attract a swarm of hungry insects bent on devouring it'. The company has to find a way of protecting its honey pot. One method is by outright monopoly. Fisher cautions against investing in this type of firm. Most monopolies are eventually curtailed by the authorities. Even those that are ignored by the regulatory bodies are liable to suddenly breakdown, and are therefore not safe to invest in.

The best way to keep the insects out is to be so efficient that present and future competition consider it futile to try to do battle. The implied threat is that they will have to commit themselves to huge expenditures, and the best they can hope for is parity in terms of output efficiency. The worst will be a damaging price war that will make their shareholders hop up and down in indignation at the irrational strategy.

Economies of scale are a potential source of competitive advantage. Fisher was very much aware of this, but said that, too often, as the organization becomes larger, the operating ocst benefit is offset by the inefficiencies produced by the additional bureaucratic layers of middle management. Senior executives become increasingly isolated from the activities of subdividions and far-flung complexes; decisions are delayed and ill informed.

The greatest advantages of being the largest firm in the industry are often to be found, not on the manufacturing side of the business, but on the marketing side. Fisher was particularly enthusiastic about this. If the company is first with a new product or service and backs this up with good marketing, servicing and product improvement it may be able to establish 'an atmosphere in which new customers will turn to the leader largely because the leader has established such a reputation for performance (or sound value) that no one is likely to criticize the buyer adversely for making this particular selection'.

When a company becomes the leader in its field it seldom gets displaced so long as its management remains competent. The notion that the purchasing of the stock of the number two or number three firm in the industry is a wise investment, because they have the potential to take the premier position, whereas the leader can only go down, is regarded by Fisher as not being borne out by evidence. A well-entrenched leader with dynamic, forward-looking vigilant managers is more likely to see off a challenge than to succumb to it.

Some companies possess the advantages of low production costs and a well-recognized brand name as well as a host of other key resources to swat those pesky insects. Fisher (in the 1970s) liked to quote the case of Campbell, the soup producer. It had cost reduction through scale and backward integration, a recognized product, the most prominent position in retail outlets and one of the largest display areas, and it could spread its marketing costs over billions of cans of soup.

The competitive advantage may not come from the core activity of the firm. For example, in some retail sectors the basic business of selling goods gives the firm competitive parity and no more. What gives the edge is the skill a firm might have in handling real estate issues, for example, the quality of its leases.

Patents can provide defence against competition in the short and medium term. Fisher was cautious on this point: 'In our era of widespread technical know-how it is seldom that large companies can enjoy more than a small part of their activities in areas sheltered by patent protection. Patents are usually able to block off only a few rather than all the ways of accomplishing the same result'. He believed that even technologically led firms need other forms of protection to maintain competitive positions and succeed over the long term. These include manufacturing know-how, the quality of the sales and service organization, customer goodwill and knowledge of customer problems. 'In fact, when large companies depend chiefly on patent protection for the maintenance of their profit margin, it is usually more a sign of investment weakness than strength. Patents do not run on indefinitely. When the patent protection is no longer there, the company's profit may suffer badly'.

An alternative to patents is superiority in being able to bring together knowledge from more than one science. If you can find a firm that is way ahead of the field in this mastery of, not one, but two technologies and the interplay between these scientific disciplines, then you may have found a bonanza investment.

An excellent marketing team can create in its customers the habit of almost automatically specifying its product for reorder. Competitors find this position very difficult to weaken. For the dominant firm to achieve its position it has to do a number of things: first, build a reputation for quality and reliability; second, make sure the customer realizes the need for high quality and reliable inputs to its processes, so that it will not take the risk of buying an inferior product; third, ensure that competitors serve only small segments of the market so your brand becomes synonymous with the product item.

To achieve maximum profits the cost of the product has to be a small part of the customer's input costs. This means that a switch to a rival product from an unknown supplier will save only a small amount, but the risk of malfunction will play on the mind of the buyer. Finally, it is best to have a market structure where there are many small customers rather than a few large ones. If these customers are very specialized then all the better, because the dominant company will attune its marketing and distribution to the needs of its customers resulting in a close relationship, personal contact and targeted marketing (e.g., salesmen spending a great deal of time with customers trying to help them find solutions). These become important attributes that potential competitors would find almost impossible to emulate. It would take a major shift in technology or a decline in the firm's efficiency to lose its hold on the honey pot.

The company in possession of a strong competitive position needs to be aware of the dangers from overexploitation in the short run. It should not aim for returns on capital many times those available in the industry generally. A spectacular profit creates an irresistible inducement for a fantastic range of companies to try and compete and carry off some of the honey. Fisher suggests that a profit margin consistently 2 or 3% greater than the next best competitor is 'sufficient to ensure a quire outstanding investment'.

Credits: This article is compiled from writings of Philip Fisher and summaries found in Glen Arnold's Valuegrowth Investing, 2002.

------------------

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do
9. Philip Fisher Articles: Over-Diversification
10. Philip Fisher Articles: Stocks To Avoid

Warren Buffett Approves Bailout of Freddie And Fannie

Posted on CNBC.

• "I wouldn't change anything in the plan myself," Buffett said in an interview on CNBC. He said he expects this step will go a long way in calming the market and resolving the ambiguity surrounding the two companies.
  
  "It's best deal and the most sensible deal available now," he said. "Now, you can argue that there should have been some different rules put in decades ago, and it wouldn't have come to this."
  
  "If Bear Stearns was an 8.5 on the financial Richter scale, this was about a 9.9, or something of the sort," Buffett said. "The government really had no choice but to do something. And then the question is: did they do the most sensible thing, and they did do that." Buffett said.

Source: http://www.cnbc.com/id/26605258

Jim Rogers says that US is More Communist Than China

Wow!

Jim Rogers is certainly NOT impressed with the bailout of Freddie And Fannie.

• US Is "More Communist than China": Jim Rogers
  
  The nationalization of Fannie Mae and Freddie Mac shows that the U.S. is "more communist than China right now" but its brand of socialism is meant only for the rich, investor Jim Rogers, CEO of Rogers Holdings, told CNBC Europe on Monday.
  
  "America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it's just bailing out financial institutions," Rogers said.
  
  Stock markets jumped after the U.S. government's decision to launch what could be its biggest federal bailout ever, in a bid to support the housing market and ward off more global financial market turbulence.
  
  But Rogers said in the long term the move spelled trouble.
  
  "This is madness, this is insanity, they have more than doubled the American national debt in one weekend for a bunch of crooks and incompetents. I'm not quite sure why I or anybody else should be paying for this," Rogers told "Squawk Box Europe."
  
  European stocks soared on Monday, led by banks. UBS was up 11 percent, BNP Paribas up 8 percent, Credit Agricole up 11.1 percent and HBOS up 13.8 percent.
  
  "You certainly gonna see a huge jump in any financial institutions which owned a lot of Fannie or Freddie … because they don't have to worry about going bankrupt all of a sudden," Rogers said.
  
  "Bank stocks around the world are going through the roof, that's 'cause they've all been bailed out. You don't see the homeowners in Kansas going through the roof 'cause they're not being bailed out," he added.
  
  "A Huge Mess"
  
  However, despite the rally in Asian and European markets, the decision to take over Fannie and Freddie is likely to cause more volatility and needs careful consideration by investors, according to Rogers.
  
  It's rarely good to jump in a moving bus and right now you got a lot of buses moving. I might short some more investment banks in the US, depending on how they rally over the next week, but other than that, I'll just sit and watch," he said.
  
  Rogers, who is short on U.S. bonds, said these are likely to fall while commodities may rally. The two government-sponsored enterprises don't have good loans on their books, because "everybody else took the good stuff and dumped the bad stuff onto Fannie and Freddie," he said.
  
  From 2010, Fannie and Freddie will have to shrink their portfolios by 10 percent a year until they reach $250 billion, to reduce the risk to the taxpayer, according to the Treasury plan. But this may put additional pressure on the housing market, Rogers said.
  
  "That's going to also ensure that house prices continue to go down. It's going to be harder and harder to get a mortgage."
  
  Investors should not pin their hopes on this year's presidential election for a solution to the problems, as none of the candidates is likely to find one, Rogers said.
  
  "This is a big huge mess and neither one of them has a clue what to do next year. It's going to be a mess."

Source: http://www.cnbc.com/id/26603489/

Dow Theory Has Nothing To Do With Cycles or Foreign Markets

So says financialsense.com market commentator, Tim Woods in his editorial last Friday.

• Back in 2006 and 2007 everywhere we turned we heard about China and their enormous consumption of commodities and why the Chinese were largely responsible for fueling the commodity boom. During this same time, we were seeing one of the longest extensions of the 4-year cycle in US stock market history. Then, between July and October of 2007 we began to see a Dow theory non-confirmation occur. By November this non-confirmation had evolved into a full blown orthodox Dow theory bearish trend change. I want to point out that Dow theory has nothing to do with cycles or the foreign markets, but that the Dow theory non-confirmation and trend change occurred in conjunction with the extended 4-year cycle as well as the top in the Chinese and other equity markets. In late 2007 commodities began yet another leg up that evolved into a parabolic advance into 2008. We are now on the right hand side of that parabolic commodity advance. This is also true in regard to the Chinese stock market as well.
  
  

Do read rest of his article Global Markets, Commodities, and the Economic Downturn

Views On Current Weakness On Baltic Dry Index

Got the following notes from Kenanga Research on Baltic Dry Index.

• Shipping – dry bulk Choppy water ahead?
  
  Testing previous low? After tumbling 52% from the May 2008 peak of 11,793, the Baltic Dry Index (BDI) looks set to test the previous lows of 5,615 in Jan 2008 and 5,254 in June 2007 while trading at 5,663 during the time of writing.
  
  Accident and deaths to affect Australian iron ore production. On 3 Sept, Rio Tinto declared force majeure on some iron ore shipments after an accident where a rail car damaged one its ore dumpers at an Australian port. Though the repair is underway, it is believed that the dumper will be out of service for the next 2-3 weeks. This was followed by the closure of BHP Billiton’s Australian iron ore mines on 5 Sept 08 with the death of 2 mine workers in the Yandi mine within a short span of 10 days. Reuters reported that BHP has resumed its Australian iron ore mines on 6 Sept but the Yandi mine remains shut pending investigation on the deaths. The Yandi mine accounted for c.40m MT of iron ore production or roughly 4% of the global traded market.
  
  Vale calling for a price hike?! It was also reported on 5 Sept that Brazil's Companhia Vale do Rio Doce, the world’s largest iron ore miner had notified some Asian steelmakers that it intends to seek a 20% iron ore price hike effective 1 Sept . While Vale refused to confirm the 20% price increase, Chinese steel mines have rebuffed the hike, indicating that Vale’s demand is unacceptable.
  
  More uncertainties for dry bulk . Though Rio Tinto and BHP’s mines should return to normal post repair and implementation of better safety measures , the potential price increase by Vale has added much uncertainty to the dry bulk in the short term. According to certain contract terms, Vale may hold back up to 10% of contracted iron ore amount to be sold on the spot market. Coupled this with the weakening demand for steel where major Chinese steel producers such as Nanjing Iron & Steel United which has started to cut production and the high iron ore inventory in Chinese ports at c.60m MT or 1 month ’s consumption , Chinese steel mills may reduce Brazilian’s ore shipments to protest against the price hike. The dry bulk might suffer further should the overhanging pricing issue is dragged on. Moreover, Chinese steel mills might switch to procuring more sup ply from Australian mines, reducing tonne per mile demand further.
  
  Maintain our view that dry bulk rates would be firmer in 4Q08 coinciding with peak grain export season for the Northern hemisphere . Near term BDI performance however is likely to be volatile and will hinge on Chinese steel mills’ reaction to Vale’s call for higher ore price. Investors should reduce exposure to the dry bulk sector on the next leg up in 4Q as looming large deliveries come on stream from 2009 onwards outpacing demand.

Here are some of the recent blog postings.

1. The Collapse of the Baltic Dry Index

2. Goldman Downgrades Bulk Shippers!

3. Baltic Dry Index Keeps Falling!

4. Baltic Dry Index Stages Strong Rebound!

5. Baltic Dry Index Set For Strong Recovery???

6. Baltic Dry Index Plunges To Seven Month Lows!

7. The Baltic Dry Index Keeps On Plunging!

Philip Fisher Articles: Stocks To Avoid

Posted on Wallstraits.com before.


PHILIP FISHER: STOCKS TO AVOID

Philip Fisher, author of the classic Common Stocks and Uncommon Profits, is the doyen of growth investors. He sought companies with high growth potential, but he also looked to buy at a reasonable price that gave good value. Even high earnings growth stocks fall out of favor, become overlooked and sell for less than their underlying worth from time to time. Fisher is perhaps best known for his very early investment into Texas Instruments--in 1956!--on a hunch about a new technology called semiconductors. Today, let’s take a look at the nine warning signs outlined by Fisher for stocks to avoid.

Rejecting companies that have made mistakes

Fisher’s high-growth companies were generally involved in pioneering technologies. Failure, on occasion, is part and parcel of progress. Other stock pickers gave Fisher his chance to accumulate sotck in companies that had shown a good average success to average failure ratio in the past. The less informed investors tend to dump the stock when earnings drop sharply below previous estimates: ’time and again the investment community’s immediate consensus is to downgrade the quality of the management. As a result, the immediate year’s lower earnings produce a lower than historic price earnings ratio to magnify the effect of reduced earnings. The shares often reach truly bargain prices.’ If these companies are run by exceptionally capable people, and the mistakes are only transient, the investor will do better by placing money here than if he or she invested in a company with a management that tends to go along with the crowd, and doesn’t take the risk of pioneering.

Playing the ’in and out’ game

Despite Fisher’s extensive experience he rejected the idea that he could predict short-term price movements, and thereby benefit by selling a stock when it appeared to be too high with the expectation of buying it back again after a price correction. There is: ’A risk to those who follow the practice of selling shares that still have unusual growth prospects simply because they have realized a good gain and the stock appears temporarily overpriced.... These investors seldom buy back the stock at higher prices when they are wrong and lose further gains of dramatic proportions....I do not believe it possible to play the in and out game and still make the enormous profits that have accrued again and again to the truly long-term holder of the right stocks.’

Fisher was equally critical of those who relied on economic forecasts to time investments, which he regarded as ’silly.’ He likened the current state of our knowledge of economics (for forecasting future business trends) to the science of chemistry in the days of alchemy in the Middle Ages. There are rare occasions when speculative enthusiasm pushes stocks to ridiculous extremes (such as 1929, 1987, 2000) when an economic analysis will predict what is likely to occur. However, such analysis would be useful only one year in ten.

Fisher said, ’The amount of mental effort the financial community puts into this constant attempt to guess the economic future from a random and probabily incomplete series of facts makes one wonder what might have been acomplished if only a fraction of such mental effort had been applied to something with a better chance of providing useful... (the) investor should ignore guesses on the coming trend of general business or the stock markets. Instead he should invest the appropriate funds as soon as a suitable buying opportunity arises.’

Impatience

This is a common issue, but one that merits repeating for emphasis. There is a need for ’patience if big profits are to be made from investment. Put another way, it is often easier to tell what will happen to the price of a stock than how much time will elapse before it happens.’

The urge to follow

’Doing what everybody eles is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.’

Trying to ’come out even’ on a poor investment

The difficulty people have accepting that they made a mistake causes them to avoid taking a loss on an investment and thereby making explicit, for all the world to see, that they made a bad choice: ’More money has probably been lost by investors holding a stock they really did not want until they could at least come out even than from any other single reason. If to these actual losses are added the profits that might have been made through the proper reinvestment of these funds if such reinvestment had been made when the mistake was first realized, the cost of self-indulgence becomes truly tremendous.’

Rejecting stocks trading on lesser markets

Generally the investor should confine buying to those stocks listed on stock markets which afford a reasonably high degree of liquidity and regulation. However, it is often the case that many stocks quoted on smaller exchanges are sufficiently liquid and regulated to be of interest to the investor. Indeed, wonderful opportunities can be missed if investors overlook these markets as potential hunting grounds.

Judging a stock on the basis of its previous price change

To evaluate a stock on the basis of the price ranges at which it sold in recent years puts the emphasis on ’what does not particularly matter, and diverts attention from what does matter.’ The crucial facts needed as an input to the appraisal are to be found in the current and future influences on the performance of the underlying business. What happened to the stock price a few months or years ago is irrelevant.

Speculators sometimes try to pleat that they are being rational: they might say, ’well, the price has traded in a range for many years, it is due for a rise.’ The hidden logical assumption is that stocks go up about the same amount, and it is just a matter of spotting when it is the turn of that particular stock. Equally nonsensical is the belief that because a stock has already ’risen a lot’ it will not go any further. Past movements are of little relevance to the future. What does matter is the background conditions leading to growth over the next few years, and whether they are already reflected in the price or not. To understand these you must understand the business, not how to read charts.

Start ups

Start-up companies, particularly in the high technology field, are often alluring. They may have an exciting new invention or are at the forefront in an industry with great growth prospects. It is very tempting to try to ’get in on the ground floor’ by buying into such companies. Fisher avoided companies that did not have an operating history of two or three years and at least one year of operating profit. His reasoning was that the investor needs to be able to evaluate the quality of the operations of the major functions of the business (production, sales, cost accounting, research, management teamwork, and so on) and this is very difficult to do for a very young company. The opinions of qualified observers on the matter of the company’s strengths and weaknesses will not yet be properly informed. Likely future difficulties or competitive threats can only be guessed at. In short, Fisher-type analysis is simply not possible, and the stock buyer is therefore gambling, unless they have highly specialized skills and knowledge.

Over-stressing diversification

Everyone is aware of the horrors of putting too many eggs into one basket. Few people consider the ’evils’ of the other extreme. ’This is the disadvantage of having eggs in so many baskets that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put in them.’ Fisher regarded it as appalling that investors were persuated to spread their funds between 25 or more stocks. The investor, or his advisor, is highly likely to be placing money in companies of which they know little. The result is that only a small proportion of the money is left for placement in companies of which they have a thorough understanding. ’It never seems to occur to them, much less to their advisers, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.’

He draws an analogy with an infantryman stacking rifles to illustrate the degree of diversification needed. The ’stack’ would be unstable with just two rifles. Five or six, properly placed, would be much firmer. ’However, he can get just as secure a stack with five as he could with fifty.’ Fisher suggested that if the investor was focused on large well-entrenched growth stocks then the minimum degree of diversification should be five such stocks-- with no more than 20% in each.

------------------

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do
9. Philip Fisher Articles: Over-Diversification

Market Reacting Postively to The Big Bailout Of Freddie & Fannie

It just has to happen.

And as stated on Saturday's posting, Bill Gross Massive Statement To The Feds, Inflation, Boone Pickens Latest View on Oil And Baltic Dry Index Keeps On Diving!

• But as far as Gross is concerned, if Fannie Mae , Freddie Mac, Citigroup and Merrill Lynch hold offerings to raise capital, Pimco will be sitting them out.
  
  This puts Henry Paulson and the Treasury Department in position to have to act. Washington has been holding on any kind of bailout, hoping that buyers like Gross will keep struggling banks afloat. But by refusing to take part, Gross, the biggest bond buyer in the world, is in effect calling the Treasury’s bluff.

And how Paulson and his team has reacted by seizing control of Freddie and Fannie. See Government Takes Control of Fannie, Freddie and Paulson's Full remarks. In my opinion, there was no alternative.

And the markets from Asia are now reacting positively on the news of the bailout. Asian Markets Soar 2% on Fannie, Freddie Bailout

Philip Fisher Articles: Over-Diversification

Posted on Wallstraits.

---------

PHILIP FISHER ON OVER-DIVERSIFICATION

Everyone is aware of the horrors of putting too many eggs into one basket. Few people consider the 'evils' of the other extreme-- the disadvantage of having eggs in so many baskets that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put into them.

Philip Fisher regarded it as appalling that investors were persuaded to spread their funds between 25 or more stocks. The investor, or his adviser, is highly likely to be placing money in companies of which they know little. The result is that only a small proportion of the money is left for placement in companies of which they have a thorough understanding. As Fisher said, 'It never seems to occur to them, much less to their advisers, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification.'

Fisher draws an analogy with an infantryman stacking rifles to illustrate the degree of diversification needed. The 'stack' would be unstable with just two rifles. Five or six, properly placed, would be much firmer. 'However, he can get just as secure a stack with five as he could with fifty.' The analogy is inadequate in one respect: the number needed for a stack does not depend on the type of rifles, but the number of stocks needed for adequate diversification does depend on the nature of the stocks in the portfolio.

For example, some chemical firms have a considerable degree of diversification within them-- serving different markets, industries and consumers. Another risk reducing factor is the extent to which the companies are run by a broadly based management team rather than a one-man management. Investing in a number of cyclical industry stocks will need to be balanced by investing a reasonably large proportion of the fund in stocks less subject to fluctuation. It would be unwise to invest a high proportion of the fund in stocks belonging to one industry, say bank stocks. On the other hand an investor who splits the fund equally between ten stocks in ten different industries may be over-diversified.

Fisher suggested that if the investor was focused on large well-entrenched growth stocks then the minimum degree of diversification should be five such stocks-- with no more than 20% in each. Also, there should be very little product line overlapping. If the focus is on companies that are more established than start-up technology stocks, but are not yet leading and well-entrenched growth stocks, then the investor should not put more than 8-10% of the fund in each. The final category is small companies, 'with staggering possibilities of gain for the successful, but complete or almost complete loss of investment for the unsuccessful.' Never put more money into these than you can afford to lose and never put more than 5% of the fund into one stock.

Investors should only add more securities to their portfolio if they can keep track of all the company events, strategic conditions, management quality and a host of other factors about each company. As Fisher puts it...

Practical investors usually learn their problem is finding enough outstanding investments, rather than choosing among too many... Usually a very long list of securities is not a sign of the brilliant investor, but one who is unsure of himself. If the investor owns stock in so many companies that he cannot keep in touch with their management directly or indirectly, he is rather sure to end up in worse shape than if he had owned stocks in too few companies. An investor should always realize that some mistakes are going to be made and will not prove crippling. However, beyond this point he should take extreme care to own not the most, but the best. In the field of common stocks, a little bit of a great many can never be more than a poor substitute for a few of the outstanding.

Credits: Much of this article is extracted from Valuegrowth Investing by Glen Arnold, Chapter 5: Philip Fisher's bonanza investing.

------------------

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock
8. Philip Fisher: 10 Commandments That An Investor Must Not Do

Bill Gross Massive Statement To The Feds, Inflation, Boone Pickens Latest View on Oil And Baltic Dry Index Keeps On Diving!

What a week!

Pimco's Bill Gross September 2008 letter was massive, There's a Bull Market Somewhere

The following passages were massive!

• This rarely observed systematic debt liquidation is what confronts the U.S. and perhaps even the global financial system at the current time. Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami. Central bankers, of course, adopting the cloak and demeanor of firefighters or perhaps lifeguards, have been hard at work over the past 12 months to contain the damage. And the private market, in its attempt to anticipate a bear market bottom and snap up “bargains,” has been constructive as well. Over $400 billion in bank- and finance-related capital has been raised during the past year, a decent amount of it, by the way, having been bought by yours truly and my associates at PIMCO. Too bad for us and for everyone else who bought too soon. There are few of these deals now priced at par or above, which is bondspeak for “they are all underwater.” We, as well as our SWF and central bank counterparts, are reluctant to make additional commitments.
  
  Step 2 on our delevering blackboard therefore has stalled and is inevitably morphing towards Step 3. Assets are still being liquidated but there is an increasing reluctance on the part of the private market to risk any more of its own capital. Liquidity is drying up; risk appetites are anorexic; asset prices, despite a temporarily resurgent stock market, are mainly going down; now even oil and commodity prices are drowning. There may be a Jim Cramer bull market somewhere, but it’s primarily a mirage unless and until we get the entrance of new balance sheets, and a new source of liquidity willing to support asset prices.

And the strong statement were posted on CNBC, Bill Gross to Paulson: I'm Not Buying It

• But as far as Gross is concerned, if Fannie Mae , Freddie Mac, Citigroup and Merrill Lynch hold offerings to raise capital, Pimco will be sitting them out.
  
  This puts Henry Paulson and the Treasury Department in position to have to act. Washington has been holding on any kind of bailout, hoping that buyers like Gross will keep struggling banks afloat. But by refusing to take part, Gross, the biggest bond buyer in the world, is in effect calling the Treasury’s bluff.

And over on Newsweek, another Gross, Daniel Gross writes about the falling oil. Most are believing that lower oil will ease inflation but Daneil Gross doesn't think that the great inflation scare of 2008 is over! The Bad News About Falling Oil Prices

• Yes, the falling prices of commodities are welcome news. But on the way up, and on the way down, there is rarely a direct translation of changes in commodity prices into changes in consumer prices. In recent years—and especially in the past year—businesses have acted as shock absorbers, unwilling or unable for competitive reasons to pass along the full brunt of the costs. But many of the shock absorbers have become worn, suggesting that inflation is likely to rise even if commodity prices drop.
  
  To get a sense of what I'm talking about, look at two measures of inflation: the Producer Price Index and the Consumer Price Index. The PPI measures the inflation that producers (people who buy stuff that they then package into other stuff or sell to other people) experience, and it breaks down the price increases in crude, intermediate, and finished goods. The CPI measures the inflation that consumers experience when they pay for gas at the pump, food at the grocery store, and clothes at the mall.
  
  The PPI has been on a rampage in the past year, thanks to the raging costs of raw materials, commodities, and energy. In July, the PPI rose a hefty 1.2 percent from June, and the price for finished goods rose a worrisome 9.8 percent from July 2007. In the past year, the prices of crude and intermediate goods rose an incredible 51.2 percent and 16.6 percent, respectively. These numbers bear witness to a progressive absorption of costs as goods go through the supply chain.
  
  A look at the CPI reveals another phase in inflation absorption. The CPI is running hot, too. In July, it rose 0.8 percent from June 2008, and 5.6 percent from July 2007—the highest level of this century. In the past three months, the CPI has been rising at a 10.6 percent annual rate. The data show a significant gap between the PPI (up 9.8 percent in the past year) and the CPI (up only 5.6 percent in the past year). Translated into English, it means producers have been able to pass on only about 60 percent of their higher costs to consumers. The result has been sharply lower profits. In the first 11 months of the current fiscal year, corporate income taxes are off 14.6 percent. Economist Paul Kasriel of Northern Trust notes that operating profits over the S&P 500 have declined year over year for three straight quarters. Last week, with 96 percent of the constituents having reported, S&P 500 profits were down 29 percent from the year before.
  
  But isn't that all in the past? After all, we know the Federal Reserve and the stock market are more concerned about the next three months than the last three months. And the recent fall in commodity prices should, in theory, translate into lower prices for all participants in the economy. Or maybe not. First, there's always a lag between the action in the commodity markets and the prices of finished goods—especially at a time when companies desperately need to pad their margins. Second, despite the action in the commodity pits in recent weeks, the indicators of inflation at the producer level have picked up pace through this year, accelerating through the second quarter and into July.
  
  Third, many companies have reached their limit in absorbing higher costs. That is why we've had large bankruptcies in the restaurant industry (Bennigan's), and in retailing (Linens 'n Things). Today, every company is faced with a choice of absorbing the higher costs passed on to them by suppliers or passing them on to consumers. Many companies are choosing the latter course. Airlines are furiously tacking on charges for luggage, food, drink, blankets, and pillows. Hershey's, complaining of costs for sugar and other commodities that have risen between 20 percent and 45 percent so far this year, in August announced a 10 percent price increase. Frank Bruni reports in Wednesday's New York Times that restaurateurs are substituting cheaper goods (shiitake mushrooms instead of morels, lump crabmeat instead of jumbo lump crabmeat) and keeping the prices steady. When you pay the same for smaller portions or for goods of lower quality, that's inflation.
  So, no, the great inflation scare of 2008 isn't over. It may just be beginning.

However, on today's Business Times, our second Finance Minister says that Malaysia inflation: 'The worst is over'

• THE worst for inflation is behind us and the consumer price index (CPI) will grow slower than July's 8.5 per cent in the following two months, Second Finance Minister Tan Sri Nor Mohamed Yakcop said.
  
  Malaysia's inflation rate grew at the fastest pace in 26 years to remain high in July after a 7.7 hike in June, as higher costs of food and transportation drove the CPI up.
  
  But the government is convinced that the current high inflation rate is temporary and that raising interest rate may not be the best option to rein in price gains.
  
  "(The high) inflation is one-off and it is moderating. It should be lower than 8.5 per cent in August and September. The worst is behind us," Nor Mohamed said when interviewed by The Exchange, a business programme on TV3 in Petaling Jaya yesterday.

Boone Pickens reckons that oil will returning to $150 per barrel within a year! See video clip on Bloomberg http://www.blinkx.com/video/pickens-sees-oil-returning-to-150-a-barrel-within-year/cFLyfEPnpU3NRC9LogV1aA

And the Baltic Dry is now sinking deeper!

The BDI closed at 5663, down another 211 pts or 3.59%!!

Here are some of the recent blog postings.

1. The Collapse of the Baltic Dry Index
2. Goldman Downgrades Bulk Shippers!
3. Baltic Dry Index Keeps Falling!
4. Baltic Dry Index Stages Strong Rebound!
5. Baltic Dry Index Set For Strong Recovery???
6. Baltic Dry Index Plunges To Seven Month Lows!
7. The Baltic Dry Index Keeps On Plunging!

Philip Fisher: 10 Commandments That An Investor Must Not Do

The following is taken from Philip Fisher's book Common Stocks and Uncommon Profits.

In chapter 8 & 9 of Fisher's book, he has listed out 10 commandments..hehe 10 things an investor must not do...

1. Don’t buy into promotional companies.

When a company is in a promotional stage…all an investor or anyone else can do is look at a blueprint and guess what the problems and strong points may be. There are enough spectacular opportunities among established companies that ordinary individual investors should make it a rule never to buy into a promotional enterprise. Fisher wants to see a firm with at least one year of operational profit and two to the three years of business before investing.

2. Don’t ignore a good stock just because it is traded ‘over the counter.

3. Don’t buy a stock just because you like the ‘tone’ of its annual report.

The annual report may…reflect little more than the skill of the company’s public relations department in creating an impression about the company in the public mind.

4. Don’t assume that the high price at which a stock my be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted already in the price. …why shouldn't this stock sell five years from now for twice the price-earnings ratio of these more ordinary stocks just as it is doing now and has done for many years past?

5. Don’t quibble over eights and quarters.

If the stock seems the right one and the price seems reasonably attractive at current levels, buy ‘at the market.

6. Don’t be afraid of buying on a war scare.

At the conclusion of all actual fighting—regardless of whether it was World War I, World War II, or Korea—most stocks were selling at levels vastly higher than prevailed before there was any thought of war at all. Furthermore, at least ten times in the last twenty-two years, news has come of other international crises which gave threat of major war. In every instance, stocks dipped sharply on the fear of war and rebounded sharply as the war scare subsided. War is always bearish on money. To sell a stock at the threatened or actual outbreak of hostilities so as to get into cash is extreme financial lunacy. Actually just the opposite should be done. If an investor has about decided to buy a particular common stock and the arrival of a full-blown war scare starts knocking down the price, he should ignore the scare psychology of the moment and definitely begin buying.

7. Don’t overstress diversification.

8. Don’t forget your Gilbert and Sullivan.

9. Don’t fail to consider time as well as price in buying a true growth stock.

10. Don’t follow the crowd.

------------------

Some Comments:

How does one get a more accurate picture of the strength and weakness of a company?

Both Mary Buffett and P. Fisher talks about the scuttlebug approach.

Fisher : 'It is amazing what an accurate picture of the relative points of strength and weakness of each company in an industry can be obtained from a representative cross-section of the opinions of those who in one way or another are concerned with any particular company'.

This is an investigative technique in which the prospective investor calls the competition and customers of a business and asks them about the company in question.

Accordingly Buffett actually gets on the phone and calls the competition and asks them what they think of a particular company. All one would need to do is to spend some time in the library reading and make a few phone calls. Don't be shy. After all, it is your money, and if you are not willing to do at least a little work on your investment decisions, then it probably wouldn't be your money for very long. (M.Buffett, chapter 18, Buffettology)

According to Fisher, the business 'grapevine' is a remarkable thing. And most people, particularly if they feel sure there is no danger of their being quoted, like to talk about the field of work in which they are engaged in and will talk rather freely about their competitors. Go to five companies in a industry, ask each of them intelligent questions about the points of strength and weakness of the other four, and nine of ten a surprisingly detailed and accurate picture of all five will emerge.


------------------

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks
5. Philip Fisher: 15 Checklist When Buying A Stock

Philip Fisher: 15 Checklist When Buying A Stock

The following is taken from Philip Fisher's book Common Stocks and Uncommon Profits.

Philip Fisher wrote about 15 points one should consider when buying a stock on Chapter 3.....


1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?

2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?

3. How effective are the company’s research and development efforts in relation to its size?

4. Does the company have an above average sales organization?

5. Does the company have a worthwhile profit margin?

6. What is the company doing to maintain or improve profit margins?

7. Does the company have outstanding labor and personnel relations?

8. Does the company have outstanding executive relations?

9. Does the company have depth to its management?

10. How good are the company’s cost analysis and accounting methods?

11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition?

12. Does the company have a short-range or long-range outlook in regards to profits?

13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing benefit from this anticipated growth?

14. Does the management talk freely to investors about its affairs
when things are going well but “clam up” when troubles and disappointments occur?

15. Does the company have a management of unquestionable integrity?

------------------

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well
4. Philip Fisher Articles: Switching Stocks

The Baltic Dry Index Keeps On Plunging!

Woah!

The Baltic Dry Index keeps on plunging!

The Index closed at 5,874 down some 272 points or 4.4%!

Published on Forbes, Dry Bulk Hits Troubled Waters

• Dry bulk shipping stocks have been on the rocks recently as the rising dollar and declining commodity prices create the perfect storm for investors.
  
  It doesn't help that worries about a global economic slowdown, especially in China and Europe, and lower steel prices in China have cut into demand for shipping in the near term.
  
  Even the generally optimistic shipping analysts are sitting up and taking notice. On Wednesday, Lazard Capital Markets analyst Urs Dur downgraded Eagle Bulk Shipping (nasdaq: EGLE - news - people ), Genco Shipping and Trading (nyse: GNK - news - people ) and Navios Maritime Holding (nyse: NM - news - people ) to "hold" from "buy," despite the fact that their earnings to yield outlook is unchanged and they have little exposure to BDI weakness.
  
  It doesn't help that Chinese iron ore inventories are increasing, while steel prices decline. Dur said that Chinese iron ore inventories at its ports increased last week to 64.8 million tons, the highest level this year, with an estimated six-to-eight-weeks supply from 40 million tons at the end of August 2007. Even though steel production in China has increased more than 11% this year and China's reliance on imported iron ore needed to produce that steel has increased 20% year on year, Dur said "declining steel prices and increasing steel inventories indicate softening near-term demand for spot Capesize ships in the near term."
  
  Dahlman Rose analyst Omar Nokta said that there are conflicting reports about a rumored iron ore price hike by Vale. Chinese officials have said Vale sent notification to Chinese customers of an additional 20.0% point increase to the initial 65% to 71% price increase for iron ore fines, although Vale has not confirmed the change, he said. These rumors are "clouding the outlook for the market," although he warned that if there were a price hike it "would have a near-term negative impact and explain the violent moves down over the past three days."
  
  While analysts have been debating over the last few weeks when the dry bulk shippers will see a turnaround, Dur says that the Baltic Dry Index, which is managed by the Baltic Exchange in London and measures dry bulk shipping rates on 40 routes across the world, will likely weaken further in the near term. Even though the BDI still remains at record levels, the supply of Capesize and Panamax ships in the Pacific basin has been increasing, he said, bringing down prices.
  
  The dark cloud for dry bulk is that Dur expects spot Capesize rates to drop below the $90,000 per day mark by Friday, $4,000 less than Thursday. He also forecasts the BDI is likely to decline another 5% to 10%. Since the dry bulk stocks tend to trade with the BDI, or at least closely, Dur says, "downward pressure on the BDI does not cultivate a buying environment."
  
  
  The good news is that Dur thinks the BDI and the global economic outlook will improve in the fourth quarter.

Published on Financial Times. Chartering slowdown affects index

• The fall in the Baltic Dry Index from its record May high point reached 50 per cent Thursday on lower raw materials demand and more vessels available.
  
  The drop in the global benchmark for the cost of shipping commodities such as iron ore and grains came amid a slowdown in global economic activity and a broad sell-off of commodities.
  
  However, analysts and brokers said the fall in the index was also related to specific factors in the shipping industry, such as the seasonal slowdown in grain trading in the Atlantic in advance of the harvest.
  
  The index dropped Thursday 4.4 per cent to 5,874; the lowest level since late January, widening its slide from an all-time high of 11,793 to 50.2 per cent.
  
  Peter Norfolk, of London-based shipbrokers Simpson Spence and Young, said the market was experiencing a “real slowdown in chartering activity”.
  
  But Mr Norfolk and others said they expected a rebound in freight costs later this year.
  
  In the Forward Freight Agreements over-the-counter futures market, prices for December are above current spot quotes, suggesting charterers are expecting a rebound, although not back to the levels that were reached in May.
  
  James Leake, of Icap Shipping, said the recent fall in the Baltic Dry was not the end of a booming period for the sector.
  
  “We forecast a rebound in freight costs from November onwards on higher imports to China and a seasonal bounce back in grain activity in the Atlantic basin,” he said.
  
  Brokers said the current slowdown was the product of fewer iron ore imports by China, partly as result of heavy industries closures during the Olympic Games, but also in response to the lower overall steel demand by the country.
  
  In addition, congestion at important ports in Australia, Brazil and China had eased during the last two months.
  
  Mr Norfolk said 11 per cent of the world’s Capesize ships, some of the largest bulk carriers, were tied up in ports, down from 15 per cent in the summer.

And on Lyold's List, slack demand was mentioned. http://www.lloydslist.com/ll/news/slack-demand-wipes-out-50-of-bdi-value/20017567717.htm

• THE Baltic Dry Index has lost more than 50% of its value in just under four months, falling to 5,874 today as limited demand fails to absorb an oversupply of tonnage.
  
  The BDI, which is a benchmark measure for the dry bulk market, hit an all-time-high of 11,793 on May 20, but has since fallen close to a year low of 5,615 on January 29.
  
  The dry bulk markets have tumbled in all sectors as a lack of fresh inquires, particularly from China, have failed to absorb an excess of tonnage.
  
  China, usually a major importer in the dry bulk markets, slowed its activity ahead and during the Olympic games last month. This dampened market rates, although at the time there still remained an expectation that rates would rebound post-games.
  
  This rally in demand has so far failed to materialise and as such owners have been unable to halt the decline in rates.
  
  The capesize average time charter rate today was $85,862 per day, down $8,163 from yesterday.
  The average time charter rate has now lost a massive $148,126 since it hit an all-time-high of $233,988 per day on June 6.
  
  One London market source even held out the prospect of rates falling as low as $65,000 per day before it finds a level and bounces back.
  
  Some market watchers are still holding out hopes for a fourth-quarter rebound in rates, even if expectations have now been lowered.
  
  Another London broker said high iron ore stocks held at Chinese ports was at the “root” of the decline in rates.
  
  China has more than 70m tonnes of iron ore held at major ports.
  
  The broker added that he did not expect rates to rebound next week as there were still quite a few ships to “hoover up”.
  
  Owners, particularly in the Pacific, are feeding too much tonnage into the market, the broker said.
  
  Forward freight agreement brokers last week said that if the physical market failed to rebound either this week or next, then dry bulk derivatives contract levels for the fourth quarter could crumble.
  
  The capesize fourth-quarter contract was today trading around $123,500 per day, down from $143,500 on Monday.
  
  In the Atlantic, panamax owners have struggled to find support in rate levels, despite showing some resistance towards the end of last week.
  
  The panamax average time charter rate today was $47,670 per day. Meanwhile the panamax fourth-quarter FFA contract today was trading around $57,750 per day.
  
  For those traders taking a punt at this level, the spot market rate would have to increase by around $10,000 per day in September to justify the position.
  
  The capesize spot market rate would need to rise by nearly $40,000 per day to justify the premium of the FFA contract rate.

How now brown cow?

Still blame it on the Curse of the Cow?



Here are some of the recent blog postings.

1. The Collapse of the Baltic Dry Index
2. Goldman Downgrades Bulk Shippers!
3. Baltic Dry Index Keeps Falling!
4. Baltic Dry Index Stages Strong Rebound!
5. Baltic Dry Index Set For Strong Recovery???
6. Baltic Dry Index Plunges To Seven Month Lows!

Ranhill Says No Problem To Service Debt

Blogged yesterday, Ranhill Credit Rating Put On Negative Watch!

On today's Financial Edge, Ranhill has come out defending itself in the following article, Ranhill says it will be able to service debt

• 04-09-2008: Ranhill says it will be able to service debts
  
  KUALA LUMPUR: Ranhill Bhd, which has come under pressure after the company reported a loss of RM719.4 million in the fourth quarter (4Q) ended June 30, 2008, has reiterated that it will be able to service its current debt obligations as its cash flow remains healthy.
  
  The company said the group's cash flow was now focused on its water, power and engineering, procurement, construction and commissioning (EPCC) segments which would assist the respective divisions' operational needs and requirements.
  
  "In the next few years, the company will enjoy a period of consolidation and we are confident that we will be able to turn the difficulties and challenges of the previous years into opportunities," the company said in a statement here yesterday.
  
  In the past one year, Ranhill has taken private its subsidiaries Ranhill Utilities Bhd and Ranhill Power Bhd. The main reason is for the holding company to consolidate the cash flow from its subsidiaries in the utilities business to mitigate the fluctuating cash flow from its construction business.
  
  Ranhill, which is controlled by Tan Sri Hamdan Mohammad, also disposed of its interest in the oil and gas (O&G) companies, whereby the parent company will not have to fork out additional capital expenditure on the capital intensive business.
  
  The disposal of the O&G business contributed to the losses in 4Q as the company had to provide for RM48 million for loss on disposal and impairment in asset.
  
  Following the release of its results last Friday, Standard & Poor's said on Monday that it may downgrade Ranhill because of delays in some of its project and weaker "credit metrics".
  
  S&P placed Ranhill's corporate credit rating on watch with "negative implications". The rating agency may also downgrade the B-rating on Ranhill's US$200 million (RM690 million) notes.
  
  However, Fitch Ratings said in a statement yesterday there would be no immediate change to its rating of "B" with a stable outlook on Ranhill as the losses reported were attributable to non-cash items which have no immediate impact on its debt servicing ability.
  
  "The majority of such non-cash charges relate to the Melut basin development project in Sudan," Fitch said in a statement.
  
  It said in 4Q, Ranhill provided RM316 million on account of cost overruns incurred on this project and a further RM240 million due from its joint-venture partner in this project.
  
  In addition to those provisions, Ranhill also registered a loss of RM48 million arising from the disposal of some of its investments in the O&G exploration segment.
  
  Following its exit from the O&G exploration and production business, the biggest project in Ranhill's order book is a housing project in Libya estimated at RM13 billion.
  
  According to Fitch, the company is negotiating with the Libyan government on some amendments to the contract value to reflect the increased cost.
  
  "Given the significant size of this project, Ranhill failing to make positive cash generation from this project will adversely affect its ratings," it said.
  

Baltic Dry Index Plunges To Seven Month Lows!

Blogged on Monday, the very optimistic article on the BDI, Baltic Dry Index Set For Strong Recovery???

Just for the record, BDI closed at 6809.

Here are some of the recent blog postings.
1. The Collapse of the Baltic Dry Index
2. Goldman Downgrades Bulk Shippers!
3. Baltic Dry Index Keeps Falling!
4. Baltic Dry Index Stages Strong Rebound!
5. Baltic Dry Index Set For Strong Recovery???

Well the Baltic Dry Index has now plunged the past two days since that rather optimistic article.

And My Dearest Naruto, NO I DID NOT CURSE THE BDI!!!

The BDI closed at 6146!

And here is how the BDI has performed the past one year.

Let's be fair to our so-called local analyst. He was not the only one that was bullish. Business Standard too had released an article on the shipping industry, Better times ahead?, on Sept 1st 2008.

• Weakening of freight rates is a short-term phenomenon that will impact the shipping sector. But, healthy demand and supply bottlenecks will ensure stable growth for companies in this sector.
  
  A slowdown in consumption due to a weakening global economy has resulted in a drop in demand for shipping services. This, coupled with fears of a supply overhang, has led to a steep decline in freight rates for tankers which transport crude and oil products as well as cargo carriers that deliver iron ore and coal.
  
  The Baltic Dry Index and Baltic Dirty Tanker Index which measure cost of shipping dry commodities and crude have dipped 40 per cent apiece over their respective highs in May and July this year.
  
  The impact of this is visible on the stock prices of shipping companies which have tanked between 19-42 per cent since May versus a 15 per cent decline in the Sensex.
  
  Though things have looked better since July except for Bharati Shipyard and Shipping Corporation which have given negative returns, most companies have however returned far less than Sensex’s 12.5 per cent.
  
  While the drop in American consumption of petroleum products has caused a blip in the demand for oil and thus hiring rates for tankers, the slowdown in construction activity in China and factory closures before the start of Olympics reduced the demand for commodities and bulk vessels.
  
  Though the situation does not look too appetising, what are the implications of the current trends on the fortunes of shipping companies and ship builders?
  
  We look at the various segments including tankers, dry bulk, containers and specialised ships to ascertain the short- to -medium term movement of freight rates, supply of ships and growth prospects for Indian shipping companies and ship builders..... do read rest of article here

Despite the rather optimistic articles, shipping stocks dived yesterday.

• A NUMBER of Asian shipping companies saw their stock prices dive today after the Baltic Dry Index fell to its lowest level for almost seven months, amid wider fears that demand for commodities could slow.
  
  The crash in stock prices was led by Hong Kong-listed companies after the fall in the BDI, which dropped 225 points to 6,466, spooked investors... ( source here - subscription required!)

How?

Comparing Past Japan's Financial Crisis With Current US Financial Crisis

Here's an absolute cracker. The following article, Responding to Financial Crises: Lessons to Learn from Japan’s Experience from PIMCO compares the past Japan's financial crisis with current US Financial Crisis and focuses on the similarities and the differences between the two crisis.

Here are some interesting issues pointed out by Mr. Koyo Ozeki

Summary: The Four Phases of Japan’s Financial Crunch
Japan’s financial crisis persisted for nearly 14 years, from the burst of the economic bubble in 1991 until around 2004, but throughout that timeline there were transitions in the state of the markets and the nature of the crisis. Broadly speaking, we can divide the progression into four phases (Chart 1).

Phase 1 (1991–94): The real estate bubble collapsed, triggering an economic shock. The government responded typically with economic stimulus packages, such as public works projects.
Phase 2 (1995–96): Signs of instability appeared in the financial system. Even as banks failed due to financial difficulties, the government failed to come up with a comprehensive policy package that would address financial system issues.
Phase 3 (1997–99): The bankruptcy of major banks triggered a financial emergency. Through establishment of new laws and budgetary measures, the government nationalized failed banks and injected taxpayer money into large financial institutions. Even so, it was unable to resolve the situation.
Phase 4 (2000–04): The system again reached a crisis point due to the massive volume of excess debt held by corporations. The Financial Revitalization Program (“Takenaka Plan”) promoted the disposal of non-performing loans, and the government supplied public funds to tottering Resona Bank. These measures finally helped bring the crisis to an end.

==> The Q&A section was interesting.

Part 3: Questions and Answers Regarding Government Response

Q: Why did it take so long to resolve the crisis?
A: It took nearly 14 years from the burst of the Japanese bubble economy in 1991 until the financial crisis finally came to an end. There are several reasons for this unusually long timeframe.

Hopes for a turnaround in property prices: From the collapse of the bubble economy until the mid-1990s, most people assumed that real estate prices would eventually turn upward again. Policy makers were also focused on encouraging an economic and market recovery through fiscal stimulus measures such as public works projects.

Existence of colossal latent stock profits: At the start of the 1990s, Japanese banks had stock portfolios with unrealized profits amounting to nearly twice their net worth. This acted as a buffer for loss write-offs, encouraging a complacent stance that they could hold out until the real estate market made its comeback. The plunge in the stock prices in 2000 severely eroded these latent profits, and appraisal losses began to have a negative impact on profits. Banks and financial authorities gradually came to recognize the risks regarding the shares in their portfolios, and proceeded to trim their holdings.

Massive scale of the problem: Japan’s cumulative bad debt totaled an estimated 25–30% of GDP, while the value actually written off by financial institutions amounted to nearly 100 trillion yen (US$910 billion) or 20% of GDP. The large banks alone accounted for 75 trillion yen (US$680 billion) of this total (Chart 10). This exceeds the combined value of their net worth of 20 trillion yen (US$180 billion) and 14 years worth of net operating profits at 50 trillion yen (US$450 billion). They realized profits from their share holdings to supplement the portion that could not be covered by net operating profits. Though this conclusion is made in hindsight, it is clear that banks simply did not have the financial strength to dispose of these vast losses in a short period, and they had no choice but to take their time to write off debt using their annual earnings and unrealized profits.

Q: Why did the capital injections in 1998–99 fail to solve the problem?
A: At the time of the taxpayer money injections in 1998–99, authorities maintained the position that most of the major banks were fundamentally healthy, despite the fact that they were aware of the damage being done to bank capital by bad debt. At the same time, a credit crunch was becoming a serious issue as the banks turned increasingly reluctant to lend, and authorities provided public funds to ease the credit situation. They set their policy goals with this in mind, such as requiring banks to boost their lending to small businesses. These cash injections might be characterized as preventive actions, but because the policy had multiple objectives, it did not act as a genuine incentive to comprehensive bad debt disposal.

Q: Is rapid disposal really the key to early resolution of problem?
A: In responding to a crisis, authorities must 1) rapidly analyze the nature of the problem, 2) evaluate its scale, and 3) devise necessary measures. It is difficult to identify the precise causal relationship between financial system measures and a bottoming out in asset prices, but one lesson that can be learned from Japan’s financial crisis is that the delay in recognizing the problem during Phases 1 and 2 (1991–96) made the subsequent fallout even worse, and an underestimation of the situation’s severity and the authorities’ trial-and-error approach in Phase 3 (1997–99) caused the delay in settling the problem.

Q: How effective were the BoJ’s zero interest rate and quantitative easing policies?
A: Phase 4 of the crisis (2000–04) was a problem of surplus debt at private corporations. Under the surface, however, corporate fundamentals were improving rapidly (Chart 11). The ratio of net debt to EBITDA (earnings before interest, taxes, depreciation and amortization) in the corporate sector as a whole took a swift turn for the better, improving from 5.3 times in 1999 to 3.0 times by 2005. Reduction of capital spending mainly made debt repayment possible.

==>

Part 4: Implications for the Subprime Loan Crisis

Differences between U.S. Subprime Crisis and Japan’s CrisisBoth the subprime loan turmoil in the U.S. and the financial crisis in Japan resulted from a bubble created by the presence of surplus liquidity. However, there are several differences.

• 1. Complex structure of U.S. bubble: Whereas Japan’s bad debt problem stemmed from commercial real estate and excess corporate debt, the U.S. subprime problem involves a more complicated mixture of bubbles related to the housing market, financial institution business models and financial products for investors.

• 2. Speed of valuations: Japan’s bad debt was mostly bank lending, and valuations took some time as regulators conducted asset inspections. In contrast, the subprime loan problem involved securitized products, so market valuations were completed relatively quickly. The valuation of housing loans by commercial banks in the U.S. could take longer than securitized products, though, so we should keep a close eye on future developments.

• 3. Creditor nation vs. debtor nation: Japan is a creditor nation and does not rely on overseas financing, so its bad debt situation was an internal problem. The U.S. is a debtor nation, which complicates the matter. Also, U.S. housing loans and other securitized products are widely held by overseas investors, so the risk can easily spread to global markets. This will naturally impact how the government responds to the problem.

• 4. Scale of the problem: Japan’s bad debt problem on a cumulative basis amounted to a whopping 25–30% of the nation’s GDP (Chart 14), whereas the subprime problem is an estimated 5–10% of U.S. GDP. The difference in scale will likely affect the cost and speed of resolving the situation.

Do read the rest of the article here

The Wisdom Of Charlie Munger

On SmartMoney Magazine, there is an extremly nice feature on Charlie Munger titled, Warren Buffett's Best Man

I found the second page most interesting where it lists out five thoughts from Charlie.

• The Tao of Charlie
  
  Volatile markets. A rough economy. In 43 years of partnership with Buffett, Charlie Munger has seen it all. Five thoughts to help investors in today's environment.
  
  Avoid the Middleman
  Maybe we should think twice about our brokers and mutual funds. Munger says that due to its middling performance and high fees, the money-management industry as a whole "gives no value added" to its customers. "They are croupiers taking profits out of the system."
  
  Pick Common Sense Over Math
  Another knock against the pros? Their obsession with statistical analysis -- "boring gravel sifting," as Munger calls it -- obscures insights about which businesses are poised to succeed. "These people do involved computations, and they're walking right by great boulders of gold." Meanwhile, he and Buffett "just look for no-brainer decisions....We don't leap 7-foot fences."
  
  Think Like Ben Franklin
  Munger believes in educating himself deeply about, well, almost everything, "invading other people's territory" to develop a "mental latticework of theory" to shape his investing decisions. His poster boy for this approach: Ben Franklin. "He was a self-educated man who wandered over vast territory," Munger says. "He recognized that he needed higher math, so he went out and learned algebra....Learn your gaps, and fill them. That's what I do."
  
  Sit on Your Assets, if You Can
  While most investors associate Buffett and Munger with finding good stocks cheap, Munger points out that quality can trump price. "If you buy something because it's undervalued, you have to think about selling it when it approaches your calculation of its intrinsic value," he says. "That's hard. But if you buy a few great companies, then you can sit on your ass. That's a good thing."
  
  Make Way for China
  Munger says that China's competitive advantage over the U.S. is big and growing, but he's sanguine about it. "If the Chinese displace the Mungers, my attitude is 'bon voyage,'" he says. Of America, he adds, "our standing in the commercial world was once ridiculously high. Now it's merely high."

Philip Fisher Articles: Switching Stocks

Posted on Wallstraits: Switching Stocks

Switching Stocks

Out with the old, In with the new

We seem to have several lively discussions (e-mail and forums) this week about selling stocks. One of the topics that I believe is particularly important is the idea of switching, or selling one stock in order to buy another, nearly simultaneously. The switch is usually predicated on the belief that the stock being sold is overvalued, while the stock about to be purchased (with sale proceeds) is more undervalued (and/or has brighter future prospects). I was writing a recent review of legendary growth stock investor Philip Fisher's little known book Conservative Investors Sleep Well, when I came across this quote about switching:

Philip Fisher (1975, as discussing when to sell stocks that meet his stringent screens): "In my opinion there are important reasons such stocks should usually be retained, even though their prices seem too high: If the fundamentals are genuinely strong, these companies will in time increase earnings not only enough to justify present prices but to justify considerably higher prices. Meanwhile, the number of truly attractive companies in regard to the first three dimensions is fairly small. Undervalued ones are not easy to find."

"The risk of making a mistake and switching into one that seems to meet all of the first three dimensions but actually does not is probably considerably greater for the average investor than the temporary risk of staying with a thoroughly sound but currently overvalued situation until genuine value catches up with current prices. Investors who agree with me on this particular point must be prepared for occasional sharp contractions in the market value of these temporarily overvalued stocks."

"On the other hand, it is my observation that those who sell such stocks to wait for a more suitable time to buy back these same shares seldom attain their objective. They usually wait for a decline to be bigger than it actually turns out to be. The result is that some years later when this fundamentally strong stock has reached peaks of value considerably higher than the point at which they sold, they have missed all of this later move and may have gone into a situation of considerably inferior intrinsic quality."

Fisher raises some interesting and important ideas. First, it is no easy task to find the perfect stock. Actually, there is no perfect stock, so when one comes anywhere close to perfection you should think long and hard before selling it, even when it appears temporarily richly valued after a strong price runup.

We have faced this issue in our Wallstraits 8 Portfolio with core holding Osim International. Our original (split-adjusted) May 2001 purchase price was 28 cents/share, with a total investment of about S$88,000. Today, Osim has risen to 72 cents/share, and our $88,000 has grown to $238,000, or a 168% total return (including dividends). That's an almost frightful gain in just a little over one year. Fisher's advice is... "even though their prices seem too high: If the fundamentals are genuinely strong, these companies will in time increase earnings not only enough to justify present prices but to justify considerably higher prices.

Thankfully, we avoided the sell instinct as Osim was rising over the last year. How? By taking Fisher's advice and going back to our 8 Screens. Osim's fundamentals were not only genuinely strong, but were improving quarter by quarter. Without this logical and rational switch-check process in place, I'm quite sure we would have been strongly tempted to bag a profit somewhere along the way... maybe 25%, maybe 50%, maybe 100%...

Fisher's second keen insight deals directly with switching from one stock already in your portfolio to another that looks attractive. He seems to advise against the switch with the reasoning: "The risk of making a mistake and switching into one that seems to meet all of the first three dimensions (Fisher's screens) but actually does not is probably considerably greater for the average investor than the temporary risk of staying with a thoroughly sound but currently overvalued situation until genuine value catches up with current prices."

Switching from a proven core holding to a unknown new holding is dangerous stuff according to Fisher (and he was drawing on decades of knowledge and a very strong track record). Not all holdings in your portfolio may be "core" holdings. Some of these minor holdings, or holdings that are showing a decay in fundamentals may reasonably be considered switching candidates when a newcomer scores very high on your screens. I think the key is to stay as unemotional as possible, rely on and trust your screens, and stick with your rare winners as long as they continue to show good business progress. Patience and logic.

------------------

Previous Philip Fisher articles

1. Philip Fisher Articles: Finding Growth Stock
2. Philip Fisher Articles: Investing in Growth
3. Philip Fisher Articles: Conservative Investors Sleep Well

Ranhill Credit Rating Put On Negative Watch!

The following postings were blogged recently in July 2008.

1. Ranhill: Our Financial News Being Used To Drive The Stock Higher!
2. Ranhill Answers: Our Financial News Being Used To Drive The Stock Higher!
3. Ranhill Privatisation Rumours: What's Up With The Owner Disposing?

Here's a recap on what has happened.

Shenanigans were done via our financial press suggesting that Ranhill could be taken private by its owners and of course the stock flew up, up and away.

And what was ironic when the owner was disposing shares in the open market.

End of last month, Ranhill announced its earnings. In my opinion, it was a horror story.

Quarterly rpt on consolidated results for the financial period ended 30/6/2008

Losses totalled 719 million!!!!!!!!!

And if you refer to posting, Ranhill: Our Financial News Being Used To Drive The Stock Higher!, I mentioned the following regarding Ranhill's balance sheet health

• Let's look from an ownership perspective. The moment the boss buys everything, the boss would be in full control over the cash and debts. Yes, Ranill has a nice 960 million in its piggy bank but its total loans totals a whopping 3.529 billion! Yes, Ranill Bhd is in a whopping net debt of 2.569 billion! Which means by buying this company as it is, the boss would be effectively 2.569 billion in debts!

In the just announced quarterly earnings, Ranhill's balance sheet has deteriorated. Bank balances is at 888.576 million but total borrowings has soared to 4.023 billion! Which means the company is now in a net debt of a whopping 3.134 billion!!!!!!!!!

Alarm bells?

And would the owners really want to privatise this whopping junk of debt?

And this morning, I saw the following article. S&P puts Ranhill on negative watch

• The rating agency has placed the engineering group's corporate credit rating on CreditWatch with negative implications after Ranhill posted a RM690 million net loss
  
  RANHILL Bhd's corporate credit rating was put on negative watch by rating agency Standard & Poor's (S&P) after the engineering group reported a net loss last year.
  
  For the financial year ended June 30 2008, Ranhill posted a RM690 million net loss and interest coverage of 1.1 times, which were significantly lower than expected, S&P said in a press release yesterday.
  
  "While Ranhill has informed us its RM556 million provisioning is non-cash, preliminary discussions with the company indicate that there are also material delays in the Libyan housing project and ongoing independent power producer projects," said S&P credit analyst Joey Chew.
  
  "Furthermore, there are deviations from the initial business plans."
  
  The rating agency has placed its "B" corporate credit rating of Ranhill Bhd on CreditWatch with negative implications.
  
  At the same time, the "B-" rating on Ranhill's US$220 million (RM684 million) senior unsecured notes was also placed on CreditWatch with negative implications.
  
  "We will seek greater clarity on the group's revised business plan and its investment outlay," Chew said.
  
  Although the immediate concerns are alleviated by the debt service reserve account under the notes, delays in the projects that are in progress and weaker credit metrics may result in a one-notch downgrade, S&P said.
  
  Fitch Ratings, another agency, said yesterday that it saw no immediate change to Ranhill's issuer default rating of "B" with a stable outlook after the announcement of the results.
  
  "Ranhill's reported losses are attributable to non-cash items which have no immediate impact on its debt-servicing ability. The majority of such non-cash charges relate to the Melut-basin development project in Sudan," Fitch said.
  
  Still, Ranhill's liquidity continues to be weak with the profitability of its engineering and construction segment hit by cost overruns and delays in several other projects, Fitch added.
  
  Shares of Ranhill fell 13.1 per cent to 89.5 sen yesterday.

Ranhill shares closed at 89.5 sen yesterday?

Ouch!!!!

And the shares were trading above 1.40 back in July - many thanks to that privatisation speculation!!!

Update on Englotechs

Blogged almost a year ago, Englotechs Trade Receivables

I wrote the following then.

• Saw this article on the Edge Daily on Englotechs: 24-09-2007: MARC downgrades Englotechs rating on rising trade receivables
  
  
  
  • MARC said for FY2006, Englotechs registered a negative RM4.4 million CFO, while trade receivables rose to RM56.6 million in FY06 (FY05: RM38 million) due to an easing in credit terms by the company to boost revenue.

  Let's do some simple comparisons to see if what MARC is saying is reasonable on this trade receivables issue for Englotechs.

  Quarterly rpt on consolidated results for the financial period ended 31/12/2004 - trade receivables as at fy 2004 Q4 = 27.104 million. (A year ago it was at 20.963 million)

  Quarterly rpt on consolidated results for the financial period ended 31/12/2005 - trade receivables as at fy 2005 Q4 = 37.968 million.

  Quarterly rpt on consolidated results for the financial period ended 31/12/2006 - trade receivables as at fy 2006 Q4 = 56.998 million!

  So if one use fy 2003 trade receivables of 20.963 million as a guide, Englotech's trade receivables has been compounding at an annual rate of 39.6%!

  Now this is certainly a cause of concern.

  More so when the statement reads " trade receivables rose to RM56.6 million in FY06 (FY05: RM38 million) due to an easing in credit terms by the company to boost revenue".

  To boost revenue by easing credit term? That sounds suicidal when the company has to incur more borrowings! In business, boosting revenue by offering easier credit is simply suicidal when the company itself is not on a firm financial footing.

  Now Consider this issue also.

  For its fy 2004 Q4 earnings, Englotechs was in a nett debt of 27.738 million.

  For its fy 2006 Q4 earnings, Englotechs was in a nett debt of 98.907 million!!!

  WOW! Company nett debt has increased by some 71 million!!!

  Here is Englotech's latest earnings reported in Aug 2007. Quarterly rpt on consolidated results for the financial period ended 30/6/2007

  Total cash equivalents is at 11.988 million, while total loans is at 137.689 million!!!!!! Which means Englotech is now at a nett debt 125.701 million!!!!!!!!!

  Englotech's trade receivables is now at 67.628 million!!!!!!!!!

  WOW!!!

  Yet another incredible s