Madoff: Skeptics Ask How

2001: Madoff tops charts; skeptics ask how
by Michael Ocrant

Via The Big Picture.

His Highness

Was this a comedy or some James Bond persiflage?

CNBC: Prince Alwaleed: 'Full Confidence' in Citi CEO Pandit

Money Talks

CHF 12 million returned by Peter Wuffli, which says: "I fucked up hugely". Respect for such a statement. It doesn't have to be the Japanese solution (harakiri:). But at times it is nice to hear that someone made a mistake. Not like Mr. Meritocracy Ospel saying good by with the words "UBS is well setup for the future", before going silence. On the other hand, if Mr. Grübel would actually have the dignity to also shut up, that would be also something.

Jim Rogers With Swiss Gold

Saw him in Zurich in the congress hall a day before he gave this video interview:
Jim Rogers on Bloomberg (10/24/08)
There he also proudly showed his gold coins purchased (for his daughters) that same day at the Zurich Bahnhofstrasse.

The video is only 10 minutes but well worth to watch. Other stuff he mentioned in Zurich was:
- He owns three Swiss bank accounts (his daughters own accounts as well, thought he pays his US taxes on them, again, so do his daughters:).
- He is long the CHF, as it has always been a currency of stability. Thought he is worried with the latest bank bailout of the Swiss National Bank. The other reason to be long is the unraveling of the CHF carry trades (similar to the JPY). Thought if the SNB keeps doing "mistakes", he will be out again. He is now worried for the first time in his life about the CHF.
- Commodities should bottom out and be rising again before the stock market. He had a nice chart depicting the 1930s comparing commodities and stock prices.
- Be long aggriculture (as mentioned in the video as no one likes being a farmer anymore).
- Taiwan is hot, as there is now "peace" for the first time (in his book) with China, and combining the Chinese labour market and production capabilities with the Taiwanese capital strength and technological knowhow will be a magical setup.
- Chinese stock market is down 70% and he started buying more (water, food, electricity). He didn't sell his holdings before but was long already for a couple of years.
- He owns a little ABB for years already.
- He is not good at timing, he needs advise there himself:).
- If you are a good stock picker, do it. Otherwise it is easier and saver to just own commodities/indices directly.
- Moved to Singapore instead of China, because of the terrible air in China. If Hong Kong cleans up its air, he would consider moving. Thought the problem with Singapore is, you get to hear both the worst English and Chinese. But again, he made sure to have the best teachers for his daughters.


Gold foil at the new museum Rietberg concrete entrance hall in Zurich (2007).

Buffett Bullish

NY Times article by Warren Buffett: Buy American. I Am.

Violent Volatility

Credit Suisse


Click on image for a larger version...

Edipresse


Illiquid instrument, eyh?!

1st CDS Tsunami Wave

First have a look at this (source here):

NOTIONAL AMOUNT OF DERIVATIVE CONTRACTS
TOP 25 COMMERCIAL BANKS AND TRUST COMPANIES IN DERIVATIVESJUNE 30, 2008, $ MILLIONS

Now the first numbers are balance sheet assets. Quite big numbers. The second row however have numbers that, to be honest, exceed my imagination. Those numbers consist of all kind of stuff, not only CDSs. Yet, the total market of CDSs might be in the USD 50 to 60 trillion range at this moment.

Now tomorrow on Friday October 10th we will have the auction to settle the Lehman CDSs.

The Big Picture: $400 Billion Lehman CDS Unwind?

Early October, Citi (C) credit analyst Michael Hampden-Turner estimated there is $400bn of Lehman credit derivatives that will be settled on Friday

Hence, some recent fear can now be attributed in part to jumbo losses caused by Lehman's derivative unwind . . . with JPMorgan (JPM) being the biggest potential collateral damage . JPM has the biggest derivative exposure on the Street (I have no opinion on how this impacts them or on their derivative exposure).
...
While Fannie and Freddie CDS settled at between 91.5 and 99.9 cents on the dollar., expectations are for Lehman to settle at 10 cent on the dollar -- causing a few $100 billion in losses.

From The Naked Capitalism blog's comments section

October 9, 2008 10:17 AM
Singapore Don said...

LEH CDS auction is tomorrow, October 10. It goes throguh a two stage process, as explained here

http://www.creditfixings.com/information/affiliations/fixings/auctions/current.html

The Fanny/Frerddy settlment went quite smoothly, and the agreed bond values came somewhere betweeen 91 and 99. According to my calculations (no expert), net amount that had to be paid out i.e. loss to protection writers was $1.2 billion. Divide that by 13 active participants, per participant the Fannie/Freddy CDS loss was average under $ 100 million. The Lehman auction clearing price will come out some where between 15 to 20, hopefully higher between 20 and 30. So the loss will be 85% to 70& of NET notional. Although the gross notionals in these CDS contracts are huge, net is usually smaller ( no one knows for sure how much smaller for the market as a whole although each house knows its own position. If Mack knows he has a big exposure on LEH CDS, would he be putting out "we are ok" call to all his boys yesterday?). Freddie/ Fannie Net settlement was $1.2 billion, and the average price was say 96. so the net exposure was approx $30billion. Fannie and Fredddy were the biggest insured names in the CDDS market. So for the Lehnam name, the NET exposure may be much smaller, but the loss per contract would be higher. If we say the Lehman Net Exposure is 20% to 25% of Freddie/Fannie net exposure of $30 billion, it would be around $6 billion to $7.5 billion, and with recovery at say between $50 and $60 billion total systemwide loss. Spread over the 13 major deealers, average is $4 to $ 5 billion, but the spread may be wide I dont know the bank equity analysts and the market has already factored such numbers in, but if the expectation is for lower number, than this may surprise on the upside. If the not, market may take a sigh of relief that the LEH CDS damnage is not so bad,

The only risk is that in the case of Lehman, there is much less netting i.e. the protection writers have huge one sides positions, and my estimates start blowing out.

Not an expert, just trying to decipher the numbers with some commonsense reasoning.

And from The Big Picture blog's comments section:

Posted by: The Financial Philosopher | Oct 9, 2008 1:26:31 PM

Looking at the table of derivatives exposure that Boom2Bust offered up a ways back in this thread, it strikes me as passin' strange that the CDS exposure for the top 3 banks (JPM, BoA, Citi) is so outsized in comparison to their other derivatives exposure.

Almost as if they knew that a big chunk of the CDS they had purchased were vaporous, and had over-committed to compensate for it -- if so, imagine their surprise when so much (all?) of the swaps turned out to be toxic! -- it would have been interesting to also see the CDO exposure for each of these fellas, as I really doubt that they had purchased/sold over a hundred trillion dollars worth of CDOs between the three of them.

It would be nice to see a competent panel of inquisitors (time to bring back the Spanish Inquisition?) grill the managements about this, and if it turned out that yes, they did over-commit because they were suspicious of the quality, then maybe we can find a better use for Gitmo than whatever we are currently using it for.

Or perhaps I am clueless here (there seems to be a lot of that going around recently), and there is a perfectly reasonable explanation for such outsized allocations of CDS that would fall within the envelope of legitimate business practices. If so, would some tolerant and knowledgeable soul please 'splain it to me?

Yes, can someone please explain to me wht economical sense there is in buying and selling derivatives over USD 90 trillion e.g. in the case of JP Morgan? If people said, yes, have known it all along, e.g. the UBS balance sheet was growing too big... then what please has been going on here?

Outlaw CDSs. Now!

From The Big Picture blog comments section:

Posted by: Alan Wilensky | Oct 9, 2008 12:06:14 PM

Declare all CDS instruments void and non-negotiable. The Fed and SEC can do this with a little know financial administrative called, "Tough Titty."

The Tough Titty invocation was jsut recently used to spew out the 700 (nee 880) billion dollar bailout, where the Treasury and Fed basically said, "Tough Titty", to the taxpayers.

So, for the CDS unwind, I advocate that the Tough Titty rule be invoked.

I wholeheartedly agree with this proposal! Take the funny money out of the system with a snap and let's keep going on with our real business. Not possible? Well, everything is possible.

CDS Systemic Risk

CDS Systemic risk: a primer about chain settlement risk.

An easy explanation of some theoretical problems with CDSs (and I am not sure this is the real and biggest problem with CDSs). But when you have CDS coverage of USD 60 trillion floating around, this also might be a real practical problem all too soon.

A grossly simplified example will explain it. Party A wishes to place a bet on Frannie default risk by purchasing CDS protection on Frannie. Party A buys protection from B. B is now exposed to the risk of a Frannie default and decides to hedge this risk by buying Frannie CDS protection from party C. C holds the position with net exposure for awhile, gets nervous and then offsets by purchasing protection from Party D, who then offsets the exposure with Party E.

For the sake of simplicity we will assume the default event of Frannie requires $10m in cash or securities to be delivered within 5 business days of the acknowledged default event. Now all of the parties involved have done their risk assessments of their downstream counterparty using various estimates of the counterparties credit quality and liquidity. They have each come to the conclusion, that their next counterparty has a .001% chance of failure at any point in time. They could thus assess the counterparty risk exposure in crude nominal terms as being $10mx 0.01% = $1,000. This feels safe.

Looking individually each party assumes they have $1,000 in risk. In reality A faces $4,000 in probable risk. The chain is only as strong as it weakest link. The end settlement party A has $4,000 exposure (1-(1-.0001)^4)*$1,000. Party B has a $3,000 exposure etc. The longer the chain the greater the systemic risk for the initiator and the potential for a failure to deliver on time etc.

Sad Guys On Trading Floors

C'mon guys, it's just money...

Sad Guys On Trading Floors

Someone made a blog of this. Lot's of interesting face expressions.



























Via The Big Picture.

Buffett Video On Financial Crisis

A must see:

Charlie Rose: An exclusive conversation with Warren Buffett


Via The Big Picture.

Fear Index

MarketPsych Fear Index

The MarketPsych Fear Index shows a 10-day exponential moving average of the percentage of "Fear" words in the U.S. financial news displayed over a candlestick chart of the Nasdaq 100 (QQQQ).
...
The relative percentage of Fear-related words is on the left y-axis, and the QQQQ value is on the right y-axis. ... We have proprietary technology that detects the predictive values of different types of financial language and concepts, and which underlies our asset management.

Casino Suisse

An article with Credit Suisse clients complaining in the comments section about their worthless capital protection products issued by Lehman Brothers, but actively sold from Credit Suisse, got me boiling as well.

Of course these clients were naive and not informed. But what for do you need a client adviser, if you have to read the small print yourself and if you have to be well versed with the financial markets yourself!!! Do I need to study medicine in order to go to a doctor?! And many of these products are very complicated, complex, and setup to be confusing. In fact to understand them very well, not a master in finance might be in place but some mathematical background instead (just a hint, these people call themselves Quants and they study this stuff not because it helps directly to make money yourself but because it helps to get high paying jobs - well, at least so far).

Credit Suisse claims to have weathered the storm fairly well, in addition they hire away people from UBS as if they had a growing business and even look to pick up some leftover of Lehman Brothers (like the cheap backoffice operation in India) or some other easy bait that will come along.

But just like the rest of the bunch, they don't understand how lightning fast they throw away the most precious thing any bank can possibly have, that (little rest of) trust they might still have with the people (and I am not talking of UBS here, that gambled the existance of the world's biggest wealth manager with sums no client or investor would have thought possible).

If they think the purpose of a bank is to be greedy, they will learn better the hard way. The whole concept that "the purpose of a company is to make profits" alone is simply bullshit. The purpose of a bank is that people can store their money somewhere safely. The profits then are a necessary side effect. Otherwise, just hand over the money and then?!

The big scam becomes obvious.

What made Swiss banking stand out, was the absolute trust you could put in your banker. He would travel everywhere to hand you some cash (of course, only if you played in the right league). Even the big scandals with the Jewish accounts, you can also see in the light that, even after almost 100 years, the accounts and their money were still there!!! Think that about any other countries bank accounts! My bet is in other places they would get treated more like hotmail accounts, after not too much time without any "user" activity, zip zilch ninada (thanks Bill for this point).


(In Gold We Trust - Swiss Philosophy)

Sorry, but this product is sold out...

Credit Default Swaps

Why are credit default swaps potentially (well, we will soon find out their real life impact) so devastating and pose a huge risk to the financial system?

Here I will think not about the actual amounts floating around the world. They are mind bogling, incomprehensible.
And they do not appear in the balance sheets directly, except as fair value, which might be close to zero at the moment, as long as all goes well (well, now that we have the first real casualty, we will soon learn a bit more). Instead I want to think why CDSs are inherently dangerous, just as a mind experiment.

It is not only, that they allow to distribute the risk to other parties who might have much less knowledge about the risk of depth. It is that CDSs can magnify the impact of a credit default.

Credit default swaps insure bonds. BTW, a bond is nothing else than a loan.
Let's see how the world is different if a CDS gets utilised or not.

Let's say company A issues a bond B. Party C buys some of the bond B.

Company A -> issues -> Bond B

Party C -> buys Bond B

If party C changes its mind about the quality of the bond B or the company C, and thinks there might be an increased chance that company A will default on the bond B, what can it do?

A world without CDSs:

Party C -> sells bond B -> to party D.

Maybe with a loss, if the market also thinks the same. But that is not important at this point, because company A has not defaulted on the bond B at this time, and no one knows the true probability of this event yet.

A world with CDSs:

Now company C can also buy a credit default swap.

Party C -> buys from party D -> a credit default swap E.

Now party C has to pay regular interest to party D. In exchange party D holds the risk if company A defaults on bond B.

Now party D holds the risk of bond B. Just as in the first case, when party C sold the bond B to party D.

So far all is nice and beautiful.

But, what, if party D buys the bond B, there is no other party being able to buy the same bond. Only if party D wants to sell it as well. Party C can only sell the bond once!

With CDSs, now party C could kind of sell it twice, three times, as many times as it could effort to pay the interest payments. In fact, many different parties where able to kind of "sell" the bond B many times over to many different parties (all in the form of "buying" a CDS).

Party C -> buys from Party D -> credit default swap E
Party C -> buys from Party F -> credit default swap G
Party C -> buys from Party H -> credit default swap I
Party C -> buys from Party J -> credit default swap K
Party C -> buys from Party L -> credit default swap M
Party C -> buys from Party N -> credit default swap M
etc.

All of them covering for the default of Company A on Bond B.

Now if company A really defaults on bond B, now there is not only one single party that has to pay the difference of what company C can pay back and the original value of the bond, but potentially a big number of other parties will have to do the same payments! This is pure gambling in a big scale without any grounding in any productive activity!

Now the economic impact of company A has a huge impact on many different parties, not just a one to one as with the sale of a bond.

(BTW, ironically, now Party C might actually have an incredible interest of seeing Company A to fail! They are super super short now on company A.)


Getting a loan with the promise to do something productive has the risk that this party than just goes on an extended spending fee for personal gain with the corresponding impact for its creditor.

But CDSs can magnify the impact of any loan gone sour and create a massive chain reaction of insolvencies.

What is wrong with just selling Bond B if anyone doesn't like it and in the end, well, someone will have to pay up for their mistake.

The total amount insured with CDSs goes in the trillions of USD. It seems more in value than the bonds that our outstanding.

This all reminds my of an impressive experience I had years ago in the early days of internet chatting, then the common network was called internet relay chat, short IRC.

There anyone can login, take a free pseudonym, open a chat room with a chat room name that was not yet taken, and invite other people.

The person opening the room had all the power to kick people out and ban them from the room, so they could not enter again.

He was the administrator of this room. Of course, with lot's of people hanging out in a particular room, it became a sign of prestige to hold this admin right, which BTW is transferable. So normally 80 to 100% of the people in a chat room have this admin status after a while (which was visible buy adding a "@" in front of the pseudonym name, or nick name, to be precise).

With normal chat client software, mirc the standard one, there were sophisticated macro languages and other features available. E.g. you could create a list of your friends. If a friend joined your room where you had admin rights, immediately and automatically you would give them admin rights too. And there were standard macros that would help and protect your friends. E.g. someone would kick one of your friends out of the chat room, your client would automatically kick out and ban that person out of the room as well.

Now think for a moment, what this will result in, if almost everyone in this room has admin rights?

And then... one person kicks out, for fun, only one other person?!

Of course, the person kicked out will have friends, kicking out the person who just kicked someone. Now that person has friends as well, kicking out the person helping the first person being kicked out. WHAMMMMMMMMMMMMMMBOOOM!

Almost everyone get's kicked out in a chain reaction.

That is, what you call on a chat server, a Kick Fest. A festival indeed.

It is fun the first two time. Then it get's old real fast!

An example of a negative feedback loop, that happens if all do the same, fully automated, without thinking, and than one person lights a match.

Selling a CDS without having the money to be good for is like selling a naked call when you have neither the underlying stock nor money to cover it. It is not that it makes our system more stable, it makes it much more prone to a huge shake out. IMHO:).

And like a Kick Fest, it might be a good show to tell your grand children about, but it might just as quickly get pretty old restoring your "normal" life once your bank account and job has just evaporated, because a few trillion of funny/fiat money have just vanished in a man made financial mini black hole.

Gigantic Bank Run?

A comment from the comments page at The Big Picture post regarding the Funny and Freaky bailout:
Here Comes the Half Trillion Dollar Fannie/Freddie Bailout!

Cold Facts re US Banks & FDIC

A. There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

B. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

Now this GSEs bailout?! Printing the American pesos is the last desperate measure. Next - CRISIS OF CONFIDENCE

Posted by: Sunny 129 | Sep 6, 2008 11:55:47 AM

How To Steal A Company (In Russia)

... and if that doesn't work, manufacture a USD 230 million tax refund. RUSSIAN ROULETTE

Via Trader Daily.

Market Bottoms

A very common sense article about what differenciates market bottoms from market tops:

The Aleph Blog: The Fundamentals of Market Bottoms

The Investor Base Becomes Fundamentally-Driven

1) Now, by fundamentally-driven, I don’t mean that you are just going to read lots of articles telling how cheap certain companies are. There will be a lot of articles telling you to stay away from all stocks because of the negative macroeconomic environment, and, they will be shrill.

2) Fundamental investors are quiet, and valuation-oriented. They start quietly buying shares when prices fall beneath their threshold levels, coming up to full positions at prices that they think are bargains for any environment.

3) But at the bottom, even long-term fundamental investors are questioning their sanity. Investors with short time horizons have long since left the scene, and investor with intermediate time horizons are selling. In one sense investors with short time horizons tend to predominate at tops, and investors with long time horizons dominate at bottoms.

4) The market pays a lot of attention to shorts, attributing to them powers far beyond the capital that they control.

5) Managers that ignored credit quality have gotten killed, or at least, their asset under management are much reduced.

6) At bottoms, you can take a lot of well financed companies private, and make a lot of money in the process, but no one will offer financing then. M&A volumes are small.

7) Long-term fundamental investors who have the freedom to go to cash begin deploying cash into equities, at least, those few that haven’t morphed into permabears.

8 ) Value managers tend to outperform growth managers at bottoms, though in today’s context, where financials are doing so badly, I would expect growth managers to do better than value managers.

9) On CNBC, and other media outlets, you tend to hear from the “adults” more often. By adults, I mean those who say “You should have seen this coming. Our nation has been irresponsible, yada, yada, yada.” When you get used to seeing the faces of David Tice and James Grant, we are likely near a bottom. The “chrome dome count” shows more older investors on the tube is another sign of a bottom.

10) Defined benefit plans are net buyers of stock, as they rebalance to their target weights for equities.

11) Value investors find no lack of promising ideas, only a lack of capital.

12) Well-capitalized investors that rarely borrow, do so to take advantage of bargains. They also buy sectors that rarely attractive to them, but figure that if they buy and hold for ten years, they will end up with something better.

13) Neophyte investors leave the game, alleging the the stock market is rigged, and put their money in something that they understand that is presently hot — e.g. money market funds, collectibles, gold, real estate — they chase the next trend in search of easy money.

14) Short interest reaches high levels; interest in hedged strategies reaches manic levels.

...

No Bottom Yet

There are some reasons for optimism in the present environment. Shorts are feared. Value investors are seeing more and more ideas that are intriguing. Credit-sensitive names have been hurt. The yield curve has a positive slope. Short interest is pretty high. But a bottom is not with us yet, for the following reasons:

* Implied volatility is low.
* Corporate defaults are not at crisis levels yet.
* Housing prices still have further to fall.
* Bear markets have duration, and this one has been pretty short so far.
* Leverage hasn’t decreased much. In particular, the investment banks need to de-lever, including the synthetic leverage in their swap books.
* The Fed is not adding liquidity to the system.
* I don’t sense true panic among investors yet. Not enough neophytes have left the game.

Not all of the indicators that I put forth have to appear for there to be a market bottom. A preponderance of them appearing would make me consider the possibility, and that is not the case now.

Some of my indicators are vague and require subjective judgment. But they’re better than nothing, and kept me in the game in 2001-2002. I hope that I — and you — can achieve the same with them as we near the next bottom.

Via The Big Picture.

Risk Manager

Very good article how a risk manager sees the current debacle:

The Economist: Confessions of a risk manager
An insider explains why it is so hard to stop traders behaving recklessly

But we did not believe that prices on AAA assets could fall by more than about 1% in price. A 20% drop on assets with virtually no default risk seemed inconceivable—though this did eventually occur.
...
The focus of our risk management was on the loan portfolio and classic market risk. Loans were illiquid and accounted for on an accrual basis in the “banking book” rather than on a mark-to-market basis in the “trading book”. Rigorous credit analysis to ensure minimum loan-loss provisions was important. Loan risks and classic market risks were generally well understood and regularly reviewed.
...
The gap in our risk management only opened up gradually over the years with the growth of traded credit products such as CDO tranches and other asset-backed securities. These sat uncomfortably between market and credit risk. The market-risk department never really took ownership of them, believing them to be primarily credit-risk instruments, and the credit-risk department thought of them as market risk as they sat in the trading book.

The explosive growth and profitability of the structured-credit market made this an ever greater problem. Our risk-management response was half-hearted.
...
Gradually the structures became more complicated. Since they were held in the trading book, many avoided the rigorous credit process applied to the banking-book assets which might have identified some of the weaknesses.
...
Collective common sense suffered as a result. Often in meetings, our gut reactions as risk managers were negative. But it was difficult to come up with hard-and-fast arguments for why you should decline a transaction, especially when you were sitting opposite a team that had worked for weeks on a proposal, which you had received an hour before the meeting started. In the end, with pressure for earnings and a calm market environment, we reluctantly agreed to marginal transactions.

Over time we accumulated a balance-sheet of traded assets which allowed for very little margin of error. We owned a large portfolio of “very low-risk” assets which turned out to be high-risk. A small price movement on billions of dollars’ worth of securities would translate into large mark-to-market losses.
...
We had not fully appreciated that 20% of a very large number can inflict far greater losses than 80% of a small number.

John Paulson

Wow, this is ironic.

Die Zeit: Die Global Zocker

Hinter ihm liegt ein langes Wochenende – eines, an dem das amerikanische Finanzsystem bedrohlich wackelte, weil die Investmentbank Bear Stearns Bankrott angemeldet hat. Auch Paulson hat seine Gelder dort, über Bear Stearns wickelte er die Käufe und Verkäufe für seinen Fonds ab. Das ganze Wochenende hat er in Meetings verbracht, Besprechungen am Telefon geführt. Bis klar war, sein Geld ist sicher: JP Morgan übernimmt Bear Stearns, und die amerikanische Notenbank hilft beim Kauf.

Dass Paulson den ehemaligen amerikanischen Notenbankchef Alan Greenspan vor Kurzem als Berater eingestellt hat, hat an jenem Wochenende wahrscheinlich nicht geschadet.

As you may recall, John Paulson made USD 15 billion in 2007 betting on a melting sub prime market. So if you ask, where did the money go that UBS etc. lost, well, he has a chunk of it now. Nice play money. But maybe he has a better idea what to do with it, so I thought.

Just funny that he kept it at Bear Stearns. Imagine it would have all vanished again in a Bear Stearns meltdown, haha, easy come, easy go. But apparently Greenspan not only helped him to make the money... I wonder how much help Phil Gramm is for UBS today?!

Via WEISSGARNIX.

Fortis

Fortis bows to pressure and ousts CFO

the ambitious ABN Amro deal, which saw Fortis take over its Dutch rival’s retail banking, private banking and asset management arms for €24bn last autumn.

The move, undertaken in concert with Royal Bank of Scotland and Santander of Spain, landed Fortis in a precarious position even after it undertook Europe’s second-largest rights issue ever, worth €13.4bn, to finance it.

The bank then startled investors in June when it scrapped its interim dividend and raised a further €1.5bn of equity as part of a plan to boost its capital reserves by €8.3bn in spite of assurances that no such move was necessary.

Shares in Fortis, which yesterday rose 8 cents to €9.16, are worth a third of their €29 peak before the crunch, leaving the bank with a market capitalisation worth less than what it paid to enter the ABN Amro deal.

Not long ago Fortis used to pay a dividend of EUR 1.40 per share annually. Obviously the market didn't believe this was sustainable and was right (would be a dividend yield of over 15 % otherwise).

Merrill Lynch

Bloomberg: Merrill to Sell $8.5 Billion of Stock, Unload CDOs

In yesterday's statement, Merrill said it agreed to sell $30.6 billion of collateralized debt obligations -- the mortgage- related bonds that have caused most of the firm's losses -- for $6.7 billion. The buyer is an affiliate of Lone Star Funds, a Dallas-based investment manager.

``Our consistent focus has been to opportunistically reduce risk, and in order to take advantage of this sizeable sale on an accelerated basis, we have decided to further enhance our capital position,'' Thain, 53, said in the statement.

`Little Disheartening'

Merrill will provide financing for about 75 percent of the purchase price, according to the statement. The financing is secured only by the assets being sold, meaning Merrill would absorb any losses on the CDOs beyond $1.68 billion.

In other words: ML gets a USD 1.68 billion cash infusion (hopefully), but otherwise keeps the remaining risk on the USD 5 billion CDO crap without having any upside potential. If it wasn't so obvious anyway (selling Bloomberg stake and on and on), this looks pretty desperate.

WEISSGARNIX has more comments (in German) on the shareholder dilution etc.

WEISSGARNIX

Good analysises, funny comments. I could say unfortunately in German, but actually it is this blog's strength.

WEISSGARNIX
Wirtschaft & Politik aus allerletzter Hand …

Here two example posts, a good look at the recent Credit Suisse quarterly result...

Credit Suisse, Version für Erwachsene

... and here some Barrack-Berlin impressions (hehe:):

Aus Obamas JFK-Karaoke

Housing Crisis

Brett Steenbarger took a first hand look at the housing market around his area. Very well worth the read!

Beneath the Housing Crisis: Variation in Housing Inventory

It was clear from our drive that there is no single housing crisis. Much of Naperville real estate is in slow-down mode: prices are holding reasonably well, but taking longer, on average, to sell. In the formerly hot areas of development, however, the overexpansion is mind-boggling. Not even free cars and large rebates can move the inventory--particularly with the tightening of mortgage loan criteria for would-be buyers.

This is not an intensification of the slowdown in the general market; it is many standard deviations from the mean. I have significant doubts that many of these subdivisions are viable at any price. From the pricing of the regional bank stocks that have loaned to these developers, I don't seem to be alone in this opinion. C'mon: are you going to jump in and buy a home in a half-filled, half-built development, when it's not clear that the builder will ever be able to finish the work? Are you going to buy a condo in a partially filled building and hope that the remainder of the units will sell, so that you won't have to cover the shortfall in maintenance assessments?
...
this is like tech stocks in early 2000. While many sectors back then were overpriced and experienced a significant but normal bear market, a host of internet-related companies were brought to market with no underlying demand or value whatsoever. The bust wasn't over until many of these roundtripped to zero.

The difference, of course, with housing is that, when developments fail, contractors don't get paid; their suppliers aren't paid; bank loans go into default; mortgage-backed securities are threatened; homeowners lose value in their homes; municipalities lose property tax income; and on and on. Just as surviving the 2000-2003 period meant staying out of the formerly hot areas, I suspect that those who get through the current crisis will insulate their funds from the many areas touched by the collapse of developments that are forced to resort to increasingly desperate discounts and come-ons.
...
When I looked at the homes that were selling for $1 million and over, however, there was six years or more of inventory on the market. Is anyone likely to pony up that kind of money for what looks to be a depreciating asset? With tightening loan conditions, where are these buyers going to come from?

Short Selling

Bloomberg: Never Have So Many Short Sellers Made So Much Money

More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specializing in securities lending, show. Almost all of that is being used to speculate that shares will fall, according to James Angel, a finance professor at Georgetown University who studies short selling. The global economic slowdown, $447 billion in bank losses and an explosion of funds that can profit from stock declines spurred the increase in short selling, helping send 22 of 23 countries in the MSCI World Index into bear markets.
...
Assets at so-called 130/30 and 120/20 funds, or those that are allowed to both hold stocks and short them, may climb to $2 trillion by 2010 from $140 billion in 2007, according to a study last year by Westborough, Massachusetts-based Tabb Group. Spitalfields estimates these funds may borrow an additional $600 billion by 2010.

Via Trader Daily.

Funny & Fried

The basic accounting equation goes like:

Assets = Liabilities + Shareholder's Equity

Now for Fanny and Freddie the news paper have it that Liabilities equals USD 5000 billion. So how much will be the assets worth? 10% less than liabilities would result in a loss of USD 500 billion etc.

The NY Times has a detailed list of foreign countries that hold USD 1200 billion of these liabilities. F&F do not only threaten the US financial system, but directly the international ones as well.

Trouble at Fannie Mae and Freddie Mac Stirs Concern Abroad

Asian institutions and investors hold some $800 billion in securities issued by Fannie and Freddie, the bulk of that in China and Japan. China held $376 billion and Japan $228 billion as of June 2007, the most recent country-specific Treasury figures.

In Europe, roughly $39 billion in Fannie and Freddie debt is held in Luxembourg and $33 billion more in Belgium, countries that are home to large investment management firms. Investors in Britain hold $28 billion, and Russian buyers hold $75 billion. Sovereign wealth funds in the Middle East are also believed to be big investors in Fannie and Freddie debt.

So this is also very much about bailing out the US's international creditors.

E.g. Swiss Re has 10 billion in their books. There could be a beautiful chain reaction all over the planet if the US goverment doesn't cover any fallout.

Buffett Buffet

Lessons from Lunch with Warren Buffett

Do the Right Thing Even if it’s Hard
Buffet has become one of the richest men in the world while never sacrificing the highest ethical standards. “People will always try to stop you doing the right thing if it is unconventional,” said Buffet.

Listen to Yourself, Not the Crowd
Buffet learned at an early age from his father that it is important to listen to yourself rather than seek the affirmation of others. Although he was heavily criticized for not investing with the crowd in technology and Internet stocks in the late '90s, he stuck to what he believed and turned out to be right. During the lunch he asked his guests, “Would you rather be considered the best lover in the world and know privately that you're the worst — or would you prefer to know privately that you're the best lover in the world, but be considered the worst?"

The Numbers Don’t Lie
Buffet said that he limits contact with the managers of businesses that he invests in, choosing rather to examine the company’s financial records. By relying on the numbers he is able to focus on neutral information and prevent outside noise from affecting his decisions.

1987

We all heard that 1987 had a decent drop in the shock market.



But look at the Hong Kong Hang Seng Index, a terrible 40% drop in two days.


Wow, index investor be warned.

Here is the detailed view on the HSI for October:

Jimmy Cayne

Hilarious!

How to Think About How a Pot-Smoking, Card-Shark College Dropout Brought Down an 85-Year-Old Firm

-- October 2007: Cayne reassures investors: "Most of our businesses are beginning to rebound." Audible snickers are distinct in the background. Later that month, state-owned Chinese lender Citic pays $1bn for a 6% stake in Bear, giving the firm an approximately $20 billion valuation. You heard me. $20 billion. With a b.


-- December 2007: Bear Stearns posts fourth quarter loss of $854 million on massive mortgage-related writedowns, the first quarterly loss in its 85-year history, prompting Cayne to remark, "Mayhaps those Chinamen aren't so smart after all."

...

Posted by guest, Mar 22, 2008 7:41PM

I worked at Bear Stearns for a couple of years, earlier in the decade. Me and the head of fixed income sales were going to give a presentation to the sales force. But before we went we had to show the new Bear Stearns recruiting video. In it Jimmy said, "I love Bear Stearns...most of my personal wealth is in Bear Stearns....We will never sell Bear Stearns!" It ends and it's silent. Then the boss says, "What the fuck is he talking about...who'se gonna buy all my fucking stock?!" And then everyone went nuts throwing shit at the screen where Jimmy's smiling face was still there. That was 5 years ago. Poor bastards!

Buffett Bets Against Hedge Funds

Buffett bets a million S&P 500 will beat hedge fund

Buffett, as usual, is clear in his argument, which ends: “A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralising, and their IQ will not overcome the costs they impose on investors.

“Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.”

...

The details of the bet, which was taken on January 1 this year, were released by Carol Loomis, a friend of Buffett and senior editor at Fortune, in Monday’s issue of the magazine.

It is between Buffett (not Berkshire) and Protégé (the firm, not its funds). Each side has put up roughly $320000. The total funds were used to buy a zero-coupon t reasury bond that will be worth $1m at the bet’s conclusion.

That million will then go to charity. Protégé has put its money on five funds of hedge funds — specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses. Buffett has wagered that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds Protégé picked.

Both sides have agreed to disclose where the wager stands at Berkshire’s annual meeting every spring.

According to Loomis, “Buffett assesses his chances of winning at only 60%, which he grants is less of an edge than he usually likes to have. Protégé figures its own probabilities of winning at a heady 85%.

UBS Capital Increase Without Top Management

Very interesting (but German) article about who of the top management participates in the UBS capital increase and who doesnt (short answer, the CEO and Chairman do - nice case of signalling, and nobody else does):
SonntagsBZ: Die Kapitalerhöhung der UBS ist unbeliebt

BTW, I did not double check this, but I think to remember that if not all shares will be sold for CHF 21, then the consortium banks will take over the remaing shares for a minimum price that is much much lower (something like CHF 12 or 15?)!

via pvi.ch

On Top Of The Situation

The Card Shark : Special Situations
By Johnny Chan

If I'm out of town and get a call informing me that a particularly big net loser is willing to play super-high, I'll usually hop on the next plane to Vegas, ready to play within an hour of landing. If I'm in town, I'll either be in the game or milling around the casino ready to get in the game when that guy is likely to be playing. And I'll almost always stay in the game as long as he's playing, putting most everything else on hold until he leaves town. I do this for a very simple reason: One week can often end up being worth more to me than the subsequent month or two.
...
For those who were on top of the situation, following the events over the weekend and ready to take advantage at market open Monday, there was much profit to be had.

In both poker and trading, doing your homework and consistently staying on top of prevailing conditions will do wonders for your bottom line. Train yourself to be ready and willing to take advantage of those special situations that come around infrequently. They can often be worth many months of regular work.

Chart Pattern Satire

Have a look at this black swan formation.

via WEISSGARNIX/The Big Picture

Banks, Liabilities, Profits

This Bloomberg article explains very well, how banks book paper profits through their own outstanding bonds falling in value.

Merrill Lynch & Co., Citigroup Inc. and four other U.S. financial companies have used an accounting rule adopted last year to book almost $12 billion of revenue after a decline in prices of their own bonds.
...
The debate over what is known as Statement 159 adds to the number of accounting techniques called into question as the U.S. debt market unravels. Investors have criticized banks for booking some writedowns in an accounting category called ``other comprehensive income'' that bypasses their income statements.
...
Here's how it works, according to Richard Bove, an analyst at New York-based Ladenburg Thalmann & Co. A company decides to designate $100 million of its subordinated bonds as subject to mark-to-market accounting. The price of the bonds drops to 80 cents on the dollar from 100 cents. So the firm books $20 million on the ``presumed savings that you have on your liabilities,'' Bove said.

``In the real world you didn't save a dime,'' he said. ``You still owe the $100 million. It's another one of these accounting rules that basically takes you further and further away from reality.''

The Federal Reserve, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Office of Thrift Supervision objected to the rule before its passage, saying in a joint 2006 letter to the FASB that it would ``have the contrary effect'' of increasing a bank's net worth at the same time its ``financial condition is deteriorating.'
...
Merrill designated about $166 billion of liabilities, or 17 percent of its total, as fair-value instruments subject to mark- to-market accounting at the end of 2007, according to its annual report. Included in the amount were $76.3 billion of long-term borrowings and $89.7 billion of payables under securities- financing transactions.

Prices for the firm's bonds tumbled over the past year: Its floating-rate notes due in January 2015 are trading at about 87 cents on the dollar, compared with about 100 cents last June.

Merrill has said its gains from the liabilities don't add to true earnings power. In a spreadsheet posted on its Web site, Merrill says that investors who want a ``more meaningful period- to-period comparison'' should exclude the $2.1 billion of revenue recorded in the first quarter.

Merrill spokeswoman Jessica Oppenheim declined to comment. The company owns a passive 20 percent stake in Bloomberg LP, the parent of Bloomberg News.

Lehman to Goldman

Lehman, the fourth-biggest securities firm, has reported $1.9 billion of gains related to a widening of its own bond spreads. Citigroup, the largest U.S. bank by assets, has booked $1.7 billion; Morgan Stanley $1.7 billion; JPMorgan Chase & Co., the third-biggest bank, $1.7 billion; and Goldman Sachs $550 million.
...
So far, most banks' writedowns are ``unrealized,'' meaning they've been unwilling or unable to liquidate distressed assets. If prices reversed, the banks would record mark-to-market profits.

The same is true for the liabilities. Companies can't ``realize'' the mark-to-market gains on their debt unless they buy it back at the discounted price. They're unlikely to do so, because the deterioration in creditworthiness means they'd have to replace the debt with higher-cost borrowings, Willens said.

``No one's going out in the market and actually retiring this debt,'' Willens said. ``It's a shell game.''

David Moser, Merrill's managing director for accounting policy, acknowledged that concern in an April 10, 2006, letter to the FASB.

``It seems counterintuitive that when a company's credit spreads are widening, it would recognize a gain in earnings,'' Moser wrote. ``The amounts are typically not realizable and therefore less relevant.'
...
Worthington estimates that similar tightening of bond spreads at Merrill, Morgan Stanley, Lehman and Goldman Sachs may cause them to reverse $5.96 billion of revenue by the end of the year.
...
``Equity may be overstated as a result of these illusory gains that may never be realized, hindering the analysis of the equity cushion to absorb losses,'' S&P Chief Accountant Neri Bukspan wrote in a letter to the FASB.

If and when the ``illusory'' revenue is reversed as losses, the banks and brokers may have to work harder to convince investors to ignore them, Willens said.

Last Days of Bear Stearns

WSJ

1. Lost Opportunities Haunt Final Days of Bear Stearns
2. Fear, Rumors Touched Off Fatal Run on Bear Stearns
3. SEC Will Scour Bear Trading Data

By KATE KELLY

interviews with more than two dozen current and former Bear Stearns executives, directors, traders and others involved in the action paint the first detailed picture of the fractious last weeks before the Fed helped underwrite J.P. Morgan's purchase of the trading powerhouse.
...
Months before regulators pressured the firm to sell itself, nervous traders futilely begged Mr. Schwartz and his predecessor, James Cayne, to raise more cash and slash Bear Stearns's huge inventory of mortgages and the bonds that backed them.
...
At 5 a.m., Mr. Geithner convened a conference call with top government officials, including Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson Jr., to discuss the fallout from allowing the brokerage to collapse. They saw ripples spreading to thousands of firms world-wide that would involve trillions of dollars and take days to sort out. As the meeting wore on past the hour mark, Mr. Geithner warned that time was running out. Certain important credit markets were about to open. "What's it going to be?" he demanded.

Financials Capital Increases

Well, in regular intervals we get to hear the latest update of how much USD the banks had to write down so far. According to Bloomberg this has been USD 383 billion so far. You wonder how the banks were able to survived these massive writedowns. To my knowledge there has been only a single real casualty (not considering hedge funds), namely New Century. IKB, Northern Rock, West LB, Countrywide, Bear Stearns have all been knocked out but still got saved by someone (except for Countrywide in all cases by the tax payer).

Well, the reason all the other banks survived so far is, also according to Bloomberg, they increased capital buy a whopping USD 270 billion. Also, still counting.

E.g. the latest UBS capital increase will create 760 million new shares. Before the crisis UBS payed lots of money to buy back shares for up to over CHF 70 per share to bring the number of shares outstanding down to some 2'054 million shares. After this capital increase (for an expected CHF 21 per share - just compare this to the brilliant previous share buy back program!) and including the previous sale to Singapore etc. the new number of shares outstanding will be exactly 2,932,567,127 shares. Almost 43% more. A nice dilution for the existing shareholders :).

BTW, with almost 3 billion shares outstanding and Friday's share price of CHF 29.94 this will amount to a market cap of CHF 87 billion. To justify this with a meager P/E ratio of 10, UBS will have to earn after tax net income of CHF 8.7 billion. Well, wealth management might be able to earn 10 billion pre tax alone, but with still a lot of uncertainty about the existing risky positions and big question marks about the future earnings power of the investment bank, I fail to see the current upside potential. But then, I could buy some now for twenty one a share...

Buffett On Bear Stearns

From Bloomberg:

``The worry was that there would be contagion; it was a very real worry,'' Buffett said. ``If Bear Stearns had gone, the next day, somebody else would have gone. It could've been a very, very, very chaotic situation.''

Buffett, 77, said he was contacted in March before JPMorgan, the third-biggest U.S. bank by assets, agreed to buy Bear Stearns. The person calling him, whom he wouldn't identify, was ``someone responsible'' and wasn't from the Federal Reserve or the Treasury. The call lasted about half an hour, Buffett said.

Too Big for Buffett

``As I understand it, Bear Stearns had $65 billion due on Monday and I didn't have $65 billion,'' Buffett said. ``I couldn't get my mind around that situation in the required time.'' New York-based JPMorgan was the right buyer for Bear Stearns, he added.

And from MarketWatch:

Some investment banks and commercial banks are too large and complex to run, Berkshire Hathaway Chairman Warren Buffett said Saturday.

"There are firms in terms of risk that are conducting themselves in a way that makes them too big to manage," he said.

Such financial institutions are designed to survive only until there's a shock to the system that may only occur once in 50 years, Buffett said.

"That may not be in the interest of a 62-year-old executive, who will be around for the next three years to worry about that," he said.
...
If Bear had failed, one or two other investment banks would probably have collapsed within a few days, he said.

Bear had roughly $14.5 trillion of derivative contracts outstanding the day after it was bailed out, he said.
"The parties that had those contracts would have had to establish the damages that they could claim against that estate very quickly," he said.

"Imagine the damage of everyone trying to unwind those contracts," Buffett said. "That would have been a spectacle of unprecedented proportions. It would have resulted in another one or two more investment banks going down in a few days."

Another Buffett Interview

Another Warren Buffett Interview at the Wharton School.

Personally I have a hard time to understand why returns and risks should be correlated. So I found this funny:

Well, we don't think about cost of capital or risk-adjusted. I mean, we don't want to take any risk, and we don't.

And about deciding for projects:

If I say the internal rate of return we demand is 15.83, it'll be 15.84. I mean, you just can bet on it. I've never seen a project that doesn't meet your hurdle rate, you know, if they really want to do it. We don't go through those charades. And it saves my time, saves their time.

Attitude towards drawdown:

Berkshire Hathaway (BRKA, Fortune 500) stock itself has gone down 50% three times since I bought the first stock in at 7 3/8. In 1974 it got cut in half. In 1987 it got cut in half. In 1998, 2000 or so it got cut in half. So that doesn't make any difference. I mean, I just don't worry about it. I worry about permanent loss of capital. I worry about making the right businesses. I worry about keeping the managers happy. Everything else pretty much takes care of itself.

T. Boone Pickens

Video interview at Bloomberg with T. Boone Pickens. It is 1 1/2 hours long but very well worth the time.

00:00:00 Introduction; Pickens's career 00:17:11 Oil supply, demand, prices; natural gas 00:28:40 U.S. reliance on overseas oil; coal 00:39:50 Alternative energy; wind, solar power 00:46:45 Nuclear energy; U.S. energy policy 00:55:58 Pickens responds to questions.

Pointer is from The Big Picture.

Deutsche Bank Trendlines 2

When looking back at Deutsche Bank from the close at Friday 2008-05-02 till today, it had been pointed out to me in a blackboard, that the last Friday in a bar char shows a gap upwards and the open and close of that day are very close to each other. So this is supposed to be some bearish candlestick pattern (named something with a star).


Indeed, last week went mostly down.


The steep upwards trend has been also broken. If we cheat a bit and take the slightly shorter upwards trendline, that might hold and maybe there is a chance of swinging back upwards.

BTW, I removed two days from Eastern from the price history. Not sure this is the right thing to do, yet, now the downtrend looks a bit different compared to the chart drawn on Friday. With this dataset the first downtrend actually has not been broken. Thought a 62 day breakout still has happened (just considering the close). The price has now also gone through the second downtrend again.


Last not least, two insiders, Kevin Parker, head of DB asset management, and also the head of finance group sold 41'182 and 1'397 DB shares each. Hmmmmm. The EUR 4.50 dividend is being payed out on 2008-05-30 and they just sell before.

Trading Calendar

Xetra
SWX

Deutsche Bank Trendlines

Wow, Friday's close (EUR 78.33) is exactly on the down trend that is almost a year old! The latest up trend is very steep and hasn't been breached so far. Will be interesting to see what happens this week.

And! Friday's close is also the highest high for the last 62 trading days.

Buffett On Mars/Wrigley

CNBC interview: Buffett On Mars/Wrigley

Moody's

Here is a brand new NY Times article from Roger Lowenstein (author of Warren Buffet - great book, and the better known book When Genius Failed: The Rise and Fall of Long-Term Capital Management), at Yahoo you don't need a login:

Triple-A Failure

From 2002 to 2006, Moody’s profits nearly tripled, mostly thanks to the high margins the agencies charged in structured finance. In 2006, Moody’s reported net income of $750 million.

BTW, Warren Buffett is a major shareholder of Moody's. In march there was a CNBC interview where he said this:

Well, it wasn't a mistake at the price we bought it. But in terms of the--the intrinsic business value of Moody's decreased last year. I mean, Wells Fargo stock was down last year. I don't think the intrinsic business value shrunk. In fact, I said I thought it probably increased a touch. And there's a lot of companies whose stock went down where the intrinsic business value did not go down, or maybe went up. But I--our holding a Moody's, which is a significant holding, they're--I don't think there's any question that the intrinsic business value of a Moody's shrunk last year, just as McGraw-Hill owns S&P and the S&P component of McGraw-Hill, it--they have less of a moat around them and they're going to be affected for a long time by the experience of the last couple years.

I think I remember he also said something that in order to dump the Moody's stock now, he would destroy the market and it is kind of impossible to sell now this big chunk, even if he wanted to. But maybe that was in relation to PetroChina, which he sold on the way up.
In case, click through here to the original reference.

Huge Charts

STOCKscreener.info has a new maximum size for charts. Have a look at this huge UBS chart.

Here is a (also new) more moderate square sized chart of Credit Suisse for the same time frame.

Regression Lines

Small feature, but I am not aware of other places on the web where you can see this for free. STOCKscreener.info has now linear regression lines available for stock charts. It is maybe just a fun feature, but here are a few examples:




To play around yourself, just click on any of the images.

Backtesting Moving Averages

Ever looked at a chart with a moving average (MA) and thinking if it would have resulted in an outperformance when buying and selling whenever the moving average would have been crossed. Even played around with different settings for the MA with whatever tool or web site you have used?

Now with STOCKscreener. i n f o you can SEE both, the moving average AND the backtested result immediately next to (below) each other:

Let's take the Euro Stoxx 50 Index and what everyone looks at, the 200 day moving average:

Buying whenever the moving average is crossed from below and selling on the way down, trading this index since 1987 would result in an overall gain of 436.65%.

Now this is indeed a decent outperformance of simply buying and holding. Buy and hold would result in a total gain of 307.55% (just 6.82% annually, before you get too excited:).

Here are the details of when the crossing (and buying and selling) of the MA took place.

So this is all nice and beautiful, but, maybe it is not very realistic that we would be able to get in and out of any financial instrument matching this index at exactly the prices of the intersections (for an index on top we would have to buy and sell an ETF, future, or mutual fund instead).
So let's say we do the same exercise with a transaction cost (and slippage) of 1% for a single buy or sell (so in and out costs us 2%).

Wow, all of a sudden the total return drops to a meager 54.33% (again, see the details here)! The big difference is because there have been 124 transactions, each costing us 1% of our capital, and then there is the compounding effect.

Hmm, ok, to make money in real life, what can we do. Of course, we can try to reduce the number of transactions while still capturing the big price movements. So here is the picture for using a 355 day moving average:

This reduces the number of transactions to 58, but as you can see above, still captures the big moves (and leaves out the big drawdown!). And the result improved a lot to 275.21%.
Still, not as good as the 200 day MA that had no transaction costs. If you look at the list of transactions, you will see that there are a view big profits and a lot of smaller losses.

We can introduce a third parameter, an extra threshold that needs to be crossed before a transaction will take place. This will avoid doing too many extra trades while the share price jitters around the moving average. So requiring the index price not only to cross but to cross an extra 1% before exercising a trade will more than half the number of transactions down to 22 and the profit jumps up to 453.36%, more than the initial result with the 200 day MA and NO transaction costs!

A threshold of 2% will increase the result even slightly more so. Anyway, the threshold will lead to fewer trades and a reduced number of small losses. But this also decreases the size of the big profitable trades a bit.

BTW, the moving average used is actually the simple moving average (SMA). Also, the results are as of 2008-04-14 and sure will change over time.

Feel free to play around yourself for an optimal set of parameters or experiment with other indices or stocks of your interest.

Citigroup's Capital

Reuters: At Citigroup, a big loss is only part of the story

Here is some analyst remark:

And he identified plenty of exposures: $47 billion tied to "structured investment vehicles," $43 billion of leveraged loans to fund corporate buyouts, $29 billion of "super-senior" collateralized debt obligations, $24 billion of subprime mortgages, $21 billion of home equity loans with high loan-to- value ratios, $20 billion of commercial real estate trading assets and $4 billion tied to "monoline" insurers.

Let's see. That is USD 47+43+29+24+21+20+4=188 billion very very risky assets.

What is their equity in comparison?

Goodwill:                    41'204
Other intangible assets:     12'715
Total stockholder's equity: 113'598
Tangible equity:        USD  59'679

Now if the risky assets get reduced in value by 32%, that would wipe out the entire equity.
On the other hand, in the good times, C made USD 20 billion profit a year.

BTW, according to Reuters or Google the market cap is still with 122.53 billion quite high in light of the tangible equity and risky assets (thought quite low in comparison to the former earnings power).

Trading Journal

You can use STOCKscreener.info to organize your investment ideas and trading notes in close proximity to the basic underlying financial information in your own personal trading journal.

Read more about trading journals in general and how you can use STOCKscreener.info to keep one for yourself.

Box Sized Charts

STOCKscreener. i n f o   has now charts in a box size, providing a lot more space for the Y axis and still having room for more than a single chart in a row. For an example, see all all 2 year history charts of the SMI side by side in the new format:

SMI 2 years

Soros On CDS

- Credit Default Swaps USD 45 trillion outstanding world wide
- JP Morgan holds CDS in the amount of USD 16 trillion
- Bear Stearns had USD 2.5 trillion on CDS outstanding

See the whole Financial Times video interview: Soros

Pointer is from The Big Picture.

Here is a list of JP Morgan and other US investment bank derivatives volume.

That image is from Bear Stearns: The Smoking Gun(s) (and certainly not by Walter Bagehot), also found via The Big Picture.

And, the same blog as of 2008-03-29 has more on CDS: Debt Becomes Death, the Destroyer of Worlds

Luqman Arnold to UBS

Luqman Arnold's letter to UBS

Now not very exciting what Mr. Arnold has to say, but tell me, why don't the press (at least on the web) point you directly to the original source more often?!

...it is important from a prudential risk management viewpoint to observe that UBS’s leverage as measured by the ratio of total tangible assets to tangible equity doubled from approximately 40x at the end of 2002 to approximately 80x at the end of 2007; and that this leverage has increased again following the recently announced losses. UBS’s reputation has been comprehensively destroyed by proprietary trading activities totally divorced from any client business; the trading strategy exposed the bank to extreme concentration risk based on the single bet that US house prices would not fall.

Personally I think UBS should not sell the Investment Bank, but should absolutely stop any proprietary trading. Of course, there might be some top notch trading going on there that might well be worth spinning off.

China Correction

OK, with all the sub-prime attention, but as everyone has expected sooner or later, Chinese stock market is in the middle of correction, or bubble burst:


The Shanghai Composite Index is:

-45% from the high

-7% below the two week moving average

NY Times: To See a Stock Market Bubble Bursting, Look at Shanghai

"These days my family quarrels a lot," says Zhang Liying, 55, a retired hotel waitress who with her husband invested all their savings in the stock market. “My husband asked me to sell; I wanted to hold for a while. Now my husband condemns me as so stupid that we lost our family’s savings.”

Si Dansu, 68, and a retired engineer, is even more distraught, but she blames the government.

“I devoted my whole life to the country. I went to the countryside after graduation, and worked as an engineer in a Shanghai factory until retirement. I invested almost all my savings and retirement fund in the market 10 years ago. But now I’m totally penniless. All my stocks went down.”

Other parts of Asia are as bad, or worse. In India, stock prices have plunged 31 percent in Mumbai; they are off 31 percent in Japan and a whopping 53 percent in Vietnam, another booming economy. Angry investors have burned a securities regulator in effigy in Mumbai, and some are in tears in Ho Chi Minh City, Vietnam.

“Some of them have cried,” says Nguyen Quang Tri, 74, a retired cement company manager who was visiting a Ho Chi Minh City brokerage house this week. “I have my own equity, but most of the people here borrowed money from the bank.”

And:

“Look,” he said, “it took two years to go from 1,000 to 6,000 but two months to go from 6,000 to 3,500.”

The Shenzhen Component Index has still some height of fall, thought:

SMI Watchlist

All 20 SMI charts spanning the last two years all on a single page (daily updated):

SMI Watchlist

Of course, you can create your own chart lists at STOCKscreener.i n f o, public too if you like.

If the big images are too much for you, here is a grid version, ten lines with all small charts.

Zuberbühler on UBS

Remarkable video with the boss of the Swiss Federal Banking Commission:
EBK-Direktor Daniel Zuberbühler zur UBS

UBS CS Marcet Cap

Here is an interesting comparison (in German) of UBS and CS market capitalisation on the Philipp Vontobel Investment blog:

Vergleich UBS-CS

Unfortunately I am a bit late on this post. Things are moving very very fast and it will be interesting to follow recent and further developments.

Also from the PVI blog is another astonishing comparison, that of Nestle and UBS:



Also, if you are in a good mood because you don't own any UBS stock, or a bad mood because you do, you can give it a try and maybe win some of the fine wine Philipp is giving away via a lottery at his site.

Indexplus Article

Thomas Kamps and Roland Ranz of indexplus give an overview of their index timing system in the Swiss newspaper Finanz und Wirtschaft (finance and economy). I like their concept. In the good times you are diversified, while in the bad times you seek shelter and watch the game from the side line. So this is an especially interesting time to watch their system in (in-)action:).

Finanz und Wirtschaft: Aktien - Finger weg oder zugreifen?

Trading Systems

You can play around online with trading systems at STOCKscreener. i n f o.

Microhoo's 56% x 49%

After reading Bernard Lunn's piece about Xing and LinkedIn I found another interesting article of his about Google's recent reaction towards a Microsoft Yahoo merger ("it is not good for the Internet"). "What pussies" a friend mine said (sorry;-).

But so far I thought Yahoo's most valuable asset is Yahoo Finance. Of course, they also have, Yahoo Mail. And together with Microsoft that makes 56% market share for the mail market (so they say). And it is kind of a hard question, what conveys more information about you, your web surfing habits or your email exchanges.

Anyway, now comes the other scary number that Bernard Lunn brought up, that email represents 49% of web page impressions! That makes 27% market share of all internet impressions. Wow.

Here is the article: 49% & 56%: Are These What Have Brin Worried?

* Email is 49% of Impressions. Portals and Search Engines is 10% by contrast. This is some free data from Nielsen-Netratings. click on Top Site Genres.
* 56% is Microsoft and Yahoo combined market share of webmail. Gmail is down at 7%. This data is via Fred Wilson’s back of envelope calculations.

Yes both data sets can have a pretty wide margin of error, but even discounting that, this would be cause for worry.

Sure, in the early adopter world we live in, Gmail rocks and who would be seen dead with AOL or Hotmail? But that 50% market share for Microhoo is what you will see in the real world.

Hotmail has lagged terribly. Most people who used it would not return, I cannot imagine who would switch (an AOL user maybe) and most people already have email. So it is a lost cause. One major reason it lagged IMHO was Microsoft fear of cannibalizing Outlook. So they won’t offer the features that users want that both Google and Yahoo have been rushing to fill. Yahoo is reputed to have the most “Outlook-like” interface and that matters massively to people making the switch.

Microsoft will probably do the smart thing and let the Yahoo team run with email. Hotmail will die as a separate brand, eventually.
...
The real battle of course remains around search within email and thus monetization. Google is better at relevant ads in Gmail because they have a better search engine. But if Microhoo gets its act together in search, they have the bigger content/audience to monetize. Technically improving search is not that hard. Microsoft have all the R&D money they need and, more importantly, every search start-up looking to exit to them. If you really can improve search you have one fat valuation offer coming down the pike!

Here is the really interesting bit. Improving ad relevance within email does not require any searching behavior change. That is worth repeating. Say after me, “if we have 56% of 49% we have something like 25% of ad impressions and all we need to do is serve relevant ads”. Come on developers, you can fix that, right? Page rank is not relevant. Getting people to switch from Google to another search engine is not required.
...
However email is not just fodder for search it is the key to ad relevance, via the social graph. As Fred Wilson puts it, email is “the biggest social graph“.

Yes, the graph, who is connected to whom, that is indeed valuable. But the content of the mail is also, hmm, private and personal?! Everyone surfs the web, but does everyone publish there? Out in the open? Hardly. Only a minority publishes anything. But every working citizen has an email account and will write job related and private emails. Do people write everything they think in emails. Unlikely, but who would be comfortable if their mailbox would leak to the public:).

Another point, each mail has at least two parties involved. So with 10% market share of mail boxes you might actually cover twice as much percentage wise of the email universe. That doesn't help for serving ads, but, it helps building intelligence about what is going on out there and optimizing the algos. Again, it is a hard question what is more important, knowing what people search and surf on the web, or what they write in their personal email. With 56% email market share, Microhoo might actually know about maybe something like 70-80% of all mails?!

But then, who ever is in second place might just go to the NSA for a flat copy of it all in exchange for potentially better technology to snoop through it all:o).

XING 2007 Report

Impressions from XING 's 2007 annual report:

• some cities have 5% of the population in Xing


• job postings with pay per click and special mapping for members


• Xing has twice as many page impressions as LinkedIn!!! Source comScore via the annual report. LinkedIn might have 4 times as many users. Still, I think Xing is way more interesting to browse around in and to use than LinkedIn.


• But, growth in page impressions has not kept up with member growth, from 1.67 billion to 2.37 billion (42%).


• Average minutes per visitor: 27.3 (9.43 for LinkedIn), 44.0 in Germany!


• "The extension of the XING development architecture to include the web development framework Ruby-on-Rails proved to be a major factor of success in 2007 for scaling the development process. In this way, XING has taken one step closer to its long-term objective of service-oriented architecture. The functionalities such as Marketplace, PremiumWorld, etc., are already running productively on Ruby-on-Rails."


• XING has 25 developers (not sure about contractors).


• "epublica GmbH, Hamburg, which has developed the software for the XING platform and which is a shareholder of XING AG, provided services in the amount of € 2,127 thousand in the year under review (previous year: € 757 thousand). As of December 31, 2007, liabilities attributable to these services amounted to € 154 thousand (previous year: € 0)."


• Neil V. Sunderland, head supervisory board, Adinvest AG, Zumikon, Switzerland.


• Aquisition of cember.net boils down to above EUR 15 per member.

Nothing new on the member growth in 2008, which seems to have been slowed down.


Update 15:22: Last not least, interesting comparison of the strategic position of LinkedIn and XING by Bernard Lunn: LinkedIn vs. XING

Buffett PetroChina Postmortem

Chad Brand on Buffett's PetroChina investment: Should We Buy the PetroChina Stock Buffett Sold?

We made one large sale last year. In 2002 and 2003 Berkshire bought 1.3% of PetroChina for $488 million, a price that valued the entire business at about $37 billion. Charlie and I then felt that the company was worth about $100 billion. By 2007, two factors had materially increased its value; the price of oil had climbed significantly, and PetroChina's management had done a great job in building oil and gas reserves. In the second half of last year, the market value of the company rose to $275 billion, about what we thought it was worth compared to other giant oil companies.

...
However, if you are like me and think the bull market in commodities (including energy) has a lot of time left to go which could push crude oil to $150 or more in coming years, then yes, Buffett left a lot of money on the table that investors can now take for themselves. After all, PTR trades at $122 per share right now, about 80% below Buffett's own fair value calculation if you believe oil prices stay elevated long term.

STOCKscreener on PVI

STOCKscreener. i n f o has been mentioned favorably in the Philipp Vontobel Investment Blog:

Aber wie erkenne ich möglichst schnell diejenigen Titel, welche kurzfristig an Fahrt gewinnen?

Zu diesem Zweck hat mein Kollege von Stockscreener eine nette Lösung bereit. Neu bietet Stockscreener auf seiner Seite eine Funktion an, die es Ihnen erlaubt nicht nur die besten Momentum-Aktien mit Horizont von 15 Monaten herauszufiltern, sondern neu werden auch kurzfristige Laufzeiten wie 200 Tage, 50 Tage und 10 Tage berücksichtigt. Dies erleichtert einem die Suche nach kurzfristig starken Titeln enorm.

Egal was Sie aus diesem Beitrag machen. Ein Besuch auf dieser Seite lohnt sich bestimmt. Denn neben den Momentum-Funktionen bietet die Seite noch viele andere interessante Zusatzhilfen an.

Lehman Profits?

Jesse Eisinger sees some red flags in the latest Lehman income statement as well as in its balance sheet in The Debt Shuffle.

Among them:

Lehman reaped substantial earnings gains because investors thought it is more likely to go bankrupt.

For several quarters, all the investment banks have been taking gains on their liabilities. Say you owe $100 to your friend. But you run into severe problems and your friend starts to figure you can only afford to pay back $95. If you were an investment bank, the magic of fair value accounting dictates that you could get to reduce your liability. What’s more, that $5 gain gets added to earnings. Because investors thought Lehman was more likely to default, its liabilties fell in value and Lehman garnered earnings from this. How much did Lehman win through losing? $600 million in the quarter. How much was its net income? $489 million.

Lehman and all the other investment banks are following the accounting rules on this, but that $600 million is hardly the stuff of quality earnings. Indeed, Bernstein’s Hintz called the bank’s earnings quality “weak.”

Chris Browne On L&S

In "The Little Book of Value Investing" Christopher H. Browne has a small section with remarks about L&S. Well, with L&S he means the Swiss company Lindt and Sprüngli. While the Lindt chocolate bars (and right now the easter bunny) are exported to or produced in many countries and especially popular in Germany, their Sprüngli stores are local and mainly centered in and around Zurich.

Their reason to stay local was that in order to keep the quality high the products had to be fresh and produced locally and therefore they did not want to expand further away. Nevertheless their stores are all over the place in town and when it comes to chocolate in Switzerland, they are the number one brand here (well, not that they have no competition, you can go in other stores here and pay up to USD 10 for a 100g bar). Their main store with a big Caffee shop is at the heart of the city, at Paradeplatz, accross the two big Swiss bank main buildings, where Credit Suisse has its head quarter and UBS sees to its rich private banking clients.

Now let's see what Christopher H. Browne from Tweedy, Browne fame has to say about "L&S":

Another example from about the same time was Lindt and Sprungli (L&S), a Swiss candy company. Lindt makes expensive chocolates and has a great brand name. It was and is highly profitable. When we ran across Lindt and Sprungli, it was selling for 10 times reported earnings. That was pretty cheap especially since U.S. companies had recently bought another Swiss candy company and one in Norway for more than 20 times earnings. L&S was cheap for two reasons. The Swiss stock market was down because inflation had risen to an unheard of rate of 3.5 percent. The Swiss are buggo on inflation, which may help explain why they have one of the strongest currencies in the world. And Herr Sprungli had recently divorced his wife and remarried a Scientologist follower of L. Ron Hubbard. This had spooked the Swiss stock market for fear that the new Frau Sprungli might be appointed to the board of the company. A Swiss banker friend of ours told us that the former Frau Sprungli and her children had more stock in the company than her former husband, and she had told him that if he put his new wife on the board of directors, she would fire him. The Swiss are very pragmatic.

Apart from the gossip, he gives some insight into the financial numbers from a point in time that I guess is located more on the left site of this chart then the right one:

As we pursued our due diligence of the company, we saw that in addition to selling at 10 times earnings, L&S was selling at only 3.5 times cash flow. Cash flow is pre-tax, pre-interest expense earnings plus noncash charges for depreciation of fixed assets like factories and machinery. This is the money a company throws off before the tax man takes his share. Something did not compute. This was too cheap. Companies are allowed to depreciate their investments in fixed assets like factories and machinery on the theory that they wear out and the company will have to build new factories and buy new machinery over time. The number of years you can use to depreciate factories and machinery is usually dictated by government tax authorities. Switzerland is different. The companies choose their depreciation schedule. By dividing the depreciation of L&S into its fixed assets, the value of its factories and machinery, it looked like its depreciation schedule was about 26 months. Now, Switzerland is not Burma. The factories are not built of bamboo. More likely, a Swiss factory could withstand anything short of a direct nuclear hit. When we asked about this, we were told that Herr Sprungli was a very conservative man. When we made an adjustment to the rate of depreciation, L&S was selling for only 7.5 times earnings. When similar companies were bought for 20 times earnings or more, L&S looked pretty cheap.

Just for the record, official 2007 income numbers let Lindt & Srpüngli trade with a P/E of 30. At the moment, Google looks slightly cheaper.