Monday, September 29, 2008

Structured Notes

Although most structured notes are fine, however, it has become an even more risky proposition ever since the credit crisis started. Since most notes are guaranteed by a handful of firms at the top who did roaring business over the last several years, but the investors are now wakening up to the fact that a capital guaranteed product is only as good as the company guaranteeing the funds. In the case of Lehman brothers recently, all its guaranteed notes have collapsed and taken their investors moneys along with it and have excacerbated the crisis somewhat further.

Read this interesting article on the structuring of products and the sad, sad story of all investors who were holding their notes.

http://www.bloomberg.com/apps/news?pid=20601109&sid=aPQXoCH.fIa0&refer=home

Attempts of US Govt to bail itself out with taxpayers money are definitely not exaggerated

US Govt has finally announced the bailout of its nations toxic mortgage assets from the hands of its largest 'unregulated' financial insitutions to its own account (whatever all that means). This seems to be a mockery of its ownself with no embarassment whatsoever.

The Govt allowed its own laws, its own regulations, its own supervisory bodies to create a demon of its own design and then helps them out even more when things go sour. Most benefits went to shareholders and senior executives of these institutions but when the proverbial shit hit the fan, these very same executives and shareholders wanted 'bailout' from the money created by printing currency out of thin air and creating even more debt for the severely indebted US economy.

If this is not a mockery of a US Govt gone bananas, then I dont what it is.

There is still time for many investors to invest abroad and reduce their exposure to US assets and US currency.

It is just a matter of time before things get even worse. You have been warned. As I had stated in my last posting on Sept 15th that the crisis will get even worse which turned out to be on the ball.

Meanwhile, I am currently travelling and will be back after Eid holidays in Dubai and shall make my next posting sometime thereafter.

From Fortune:

How it got this bad?

http://money.cnn.com/2008/09/26/news/leverage.fortune/index.htm?postversion=2008092614

Detailed Analysis from Financial Times

http://www.ft.com/indepth/global-financial-crisis

Stay tuned...

Monday, September 15, 2008

It's a Wild Wild World: Unfolding US financial system crisis

Over the last weekend, many bankers, regulators, accountants, analysts etc etc could not sleep especially in New York where history was being created. This weekend along side the last one will be noted when America started slowing down (Last weekend Fannie Mae and Freddie Mac were nationalized in the US with the US taxpayers paying estimated USD 500billion to support the 2 failing mortgage finance entities) .

I do not believe US financial system will fall down but its decline - slow and gradual - has been in the making for the past several years. There are many reasons which we shall get to some other time but today we must note what happened to the venerable 158 year old company named Lehman brothers and the 98 year old company named Merrill Lynch over this weekend.

It is interesting to note the timelines: a meeting initiated by the Federal Reserve and US Treasury on Friday September 12, 2008 at 6pm went late night, went on all day Saturday AND Sunday!

Ultimately, at 1am ET, Monday September 15, 2008, a day to be noted in history, a press release was issued announcing that Lehman Brothers (except for its subsidiaries) will file for bankruptcy in the US state of New York today, Monday, September 15, 2008.

The unfolding saga at the 3 day marathon meeting amongst the federal regulators, Government authorities and the top 10-12 largest global banks does not end there.

Since Lehman could not be bought by competitors due to its USD 612 billion of debt obligations, large derivative & bad real estate exposure etc under a subsidy plan similar to Bear Stearns bail out by the Federal Reserve, hence, eventually, Lehman was forced to declare bankruptcy.

Interestingly, the next investment bank on the line was Merrill Lynch (Mother Merrill) which was bought out by Bank of America (one of the strong banks during this credit crisis) for USD 50 billion in stock.

Today's Headlines:

Bloomberg: `Tectonic' Shift on Wall Street as Lehman Fails, Merrill Sold

New York Times:
5 Days of Pressure, Fear and Ultimately, Failure

The Guardian, UK: Q&A: The collapse of Lehman Brothers

The BBC: The downturn in facts and figures

The end of Bear Stearns, Lehman, Freddie Mac, Fannie Mae, Merrill is just the beginning. It is expected that AIG and Washington Mutual may be next (as close as next weekend) and some others may follow. This list does not include the 81 hedge funds that have closed over the last 1 year and 283 mortgage lenders that have closed over the last 2 years nor the monthly foreclosures on US homes exceeding 50,000 per month (both May and June 2008 had over 70,000 home foreclosures in the US).

Stay tuned...

Friday, September 12, 2008

Dubai Market Seizures and the way forward

Recent discussion among most investors has been focusing on - what exactly is going on here in Dubai?

Several top real estate executives have recently been caught in a growing corruption scandal in Dubai. In comparison, the problems are quite small in the large and growing Dubai real estate market but have climbed ever so slowly every week. It appears that almost all individuals are involved in perhaps the same imbroglio.

The latest news on Thursday involved Dubai Islamic Bank once again wherein it's shares were suspended - briefly - on DFM and restarted trading once DIB clarified that it had indeed stepped in and foreclosed on a HUGE 20million Sq. ft. project in Dubailand called The Plantation.

Lest you get dejected, these problems are still small in a nascent and still developing market. A few companies do not constitute the entire market. And with the rapidly growing size of the population and excess demand for housing, the pent up demand alone is sufficient to allow the property values to continue to rise.

The investor to user ratio also has been steadily declining to approx. 70% investors and 30% users currently, according to reports, from a peak of over 95% investors.

The demand in real estate is mainly due to stricter regulations being introduced over the last year, inflow of foreign companies and accompanying funds, increasing interest from different set of investors from around the globe, the increasing number of banks willing to finance various projects and of course, increasing transparency.

The atrociously priced rents have also somehow supported the jump in sales of freehold properties until now, however, with rapidly climbing inflation and worsening savings potential, this may be a slight cause of concern going forward. Any dip in population or not fast enough rise in home prices (including off-plan properties) or inability to offload investor owned properties quickly may have a quick downward spiral effect in real estate prices. However, if anyone has held a property or properties for over 6 months (allowing prices to rise) this risk gets mitigated.

The recent downfall in DFM and ADSM markets due to lack of liquidity, developing global financial crisis across the globe and the corruption scandal is not helping investors.

We don't know yet how deep the troubles are or how far the stock markets may fall but it will be safe to presume that the enormous wealth being generated by oil inflows and the resultant expenditures by all GCC governments is leading to a wealth of opportunities for all and will make the stock markets rise again and continue to balance any negative headwinds in the real estate markets.

Just based on the last para above, I continue to remain overall positive on the growth potential, whether real estate or stocks, in all the markets comprising GCC and MENA region. One or few markets may be negative, but, when invested in all the markets via mutual funds to reduce risk, this region will be one of the best performing markets in the world over the next 2-3 years, at least after the global crisis comes to an end, sometime next year. My first post also strongly indicates that the Dubai Government is doing all it can to support the economy by protecting it (from grapevine talks as well as real physical dangers).

Do note that Cityscape Dubai 2008 will be on in about 3 weeks and prices of real estate in Dubai usually rise thereafter since new major projects are always announced therein.

Ramadan Kareem.

Tuesday, September 9, 2008

Financial Market Turbulence 2008: Why and How? Lessons from the past

Protection from falling market values: Stay invested in different countries, understand risk, remember history, also remember that anyone can & will make mistakes and markets can be very humbling.


http://www.nytimes.com/2008/09/07/business/07ltcm.html?_r=2&ref=business&oref=slogin&oref=slogin

Roger Lowenstein wrote this article in The New York Times on Sept 6th 2008.

"AS striking as the parallel is to Bear, Long-Term Capital’s echo is far more profound. Its strategy was grounded in the notion that markets could be modeled. Thus, in August 1998, the hedge fund calculated that its daily “value at risk” — meaning the total it could lose — was only $35 million. Later that month, it dropped $550 million in a day.

How could the fund have been so far off? Such “risk management” calculations were and are a central tenet of modern finance. “Risk” is said to be a function of potential market movement, based on historical market data. But this conceit is false, since history is at best an imprecise guide.

Risk — say, in a card game — can be quantified, but financial markets are subject to uncertainty, which is far less precise. We can calculate that the odds of drawing the queen of spades are 1 in 52, because we know that each deck offers 52 choices. But the number of historical possibilities keeps changing.

Before 1929, a computer would have calculated very slim odds of a Great Depression; after it, considerably greater odds. Just so, before August 1998, Russia had never defaulted on its debt — or not since 1917, at any rate. When it did, credit markets behaved in ways that Long-Term didn’t predict and wasn’t prepared for."

"Long-Term Capital’s partners were shocked that their trades, spanning multiple asset classes, crashed in unison. But markets aren’t so random. In times of stress, the correlations rise. People in a panic sell stocks — all stocks. Lenders who are under pressure tighten credit to all."

It is interesting to note that despite similarities to the collapse of Long Term Capital Management in 1998, the regulators or the Government did not do anything to prevent another collapse such as that of Bear Stearns in Mar of 2008 or that of salvaging the remains of Freddie Mac and Fannie Mae of last weekend of Sept 7th 2008 with taxpayers funds. All of this done to protect a widespread collapse of the US financial system.

A good history reminder article. We need to wait and see what the US does over the next few months to prevent the occurrence of another 'large institution failure" that will be "too big to fail" hence requiring bailout by the middle class ordinary taxpayers to save the super class rich.

Warren Buffet is somehow prescient in saying that he does not buy what he does not understand and has stated several times that he does not understand derivatives and has/will never invest in them nor buy/invest in companies that invest in derivative instruments.

However, most of the recent US institution, various hedge fund and mortgage company failures have been directly linked to mainly to derivative exposures. Go figure!

With losses of over USD 500 billion and counting, I expect total losses to be between USD 1 trillion upto USD 1.5 trillion (yes that's a trillion dollars i.e. USD 1,000,000,000,000) before this bloodbath ends sometime in middle or end of next year.

Stay tuned....

UAE to buy missiles from USA for protection

http://www.reuters.com/article/newsOne/idUSN0845547120080908?sp=true

Reuters is reporting that current US President George Bush will help UAE obtain THAAD missiles valued at USD 7 billion to protect against wayward missiles in the Middle East.

This refers to protection from any country in the region who could have hostility towards UAE. This will also help UAE protect its major investment projects currently underway wherein billions of dollars are being invested in real estate, infrastructure and other manufacturing sectors. Perception of being able to retaliate is more important than actual retaliation in today's modern world.

Whoever said....UAE does not care about its expatriate residents (over 80% to 90% of the population of UAE are expatriates, depending on whom you listen to).....does not know how the Government thinks and spends....