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.