Financial Downturns = Opportunities?

I think I don't have to talk much about the recent (or rather, an issue that has been brewing for more than 1 year) financial meltdown at Wallstreet given the great publicity and tremendous amount of news pouring in every day every hour every minute. 'Too big to fail' is no longer a guarantee when you see giants like Merrill, Lehman, Fannie Mae & Freddic Mac all going down. Morgan and Goldman were also compelled to turn to depository capital thereby ending the era of Investment Banking Giants as the standalone model gets questioned.

Just when Warren Buffet fans can still recall the guru saying that he won't touch IBs as they are overpriced, the news today scream "Buffet to Invest $5 billion in Goldman".

So what do you think about the US government pumping in more than US$700 bn into the money market and the curb down on short selling? Firstly, where does the US Government gets that much money? From taxpayers of course. And probably by printing more money (since the supposedly independent Fed is now a 'lackey' of the government) as well, you never know. And while all that liquidity pumped in may calm the market, it did not solve the problem at all.

The crisis starts from those institutions in taking in too much risk, a typical Moral Hazard. Whether or not Morgan or Goldman is a pure IB or now a bank holding does little, if not, nothing to solve the root problem. If one is greedy, and wants to take in more risk at the expense of others, you can do so anywhere. The institution does not matters. Even worse, should the management be as short sighted as Merrill or Lehman, more people's hard earned deposits will be at risk. Sure, some will argue that as bank holdings, these institutions are now regulated. But with all the hoo haa of the subprime crisis, few can still remember how a bank in UK almost failed due to the subprime as well. If you have forgot about this, please google "Northern Rock". And should such an episode play out again with the IBs replaced as banks, you get a magnitude of bank runs that will be more entangled with the people's lives and economy resulting in even worse consequences.

And with more money pumped into the money market system, one can expect inflation to come. Higher inflation to justify lower unemployment rate, back to the older styled Phillips curve. Should inflation spirals faster than expected, expect a very reactive interest rate cut.

On the topic of short selling, I have mixed thoughts about it. Sure, it did boost confidence into the capital markets. After all, the market is oiled by confidence. Without this, everything does not run anymore. And I am happy to present you a view by someone in the hedge fund research industry where I had interned:

Anyway, i disagree it is a necessary step.  Short-selling is not the
cause of the problem, it is a reaction.  Also, people are just
bunching the different types of short selling together and saying
it's wrong.  I think naked short-selling is detrimental because there
is a potential supply-demand mismatch but covered short selling is
perfectly fine.

In times of stress, the short sellers are actually the providers of
liquidity because the people who actually own the shares are loathe
to sell since it means monetizing losses. And by banning short
selling now, all the regulators have done is move people who want to
short to using derivatives such as swaps and structured notes. So,
they still have not resolved the issue of short-selling, but only
push it to a different part of the financial system.  And worse, at
least short selling is regulated as it needs to go through the
exchange so there is a clearing house.  But shorting via derivatives
is not.

Next, there are also a lot of strategies that have a valid reason to
short eg all the relative value, arbitrage strategies. They are not
shorting to make a firm go bust, they are shorting to hedge out an
undesirable exposure in their portfolio.  There is no evidence to say
that short-sellers caused the demise of the market.  A market comes
down because no one wants to buy in the first place so selling (in
any form) will push the price down.  Short-selling is just an easy
scapegoat because most people don't understand how it works and there
is no clarity on that aspect of the market.  In the past year, it has
been relatively difficult to short-sell because brokers are charging
very high costs of borrow so in fact, shorting of stocks amongst
hedge funds has really not been that prevalent (at least in the funds
in the emerging markets). Most have preferred to use cash or buy put
options and others will short index futures.

And finally, if short-selling really was the main culprit for the
mess, that means there needed to have been massive amounts of short-
selling in the system in order for the prices to be pushed down to
these levels, then someone or some group of people must be making
bucketloads of money. The people who are most likely to use shorts
are bank prop desks and hedge funds.  Banks are going bankrupt so
they're definitely not short-selling.  Most hedge funds are in the
red for the year and the ones who are positive total around 10 -20
funds of which a number are trading credit, commodities and futures
rather than outright equity. So, I have not been able to find any
beneficiaries from these mythical volumes of short-selling, then is
short-selling really as big as the papers make it out be? I think it
is just simple dumping of stock due to lack of confidence that is the
real problem.

Another anecdote, I was talking to a guy at Goldman Sachs who covers
the pension funds. The pension funds are cash rich and they all agree
that the markets are cheap now but they don't want to buy anything
because they don't trust the brokers and the custodian banks. This is
a full-blown confidence crisis on the mechanisms of trade rather than
problems with the trades themselves.

It does pay to never rely fully on the news that was reported even in the US press:)

Olympics Fever

For a country that swept in more than 20 Golds as of now, the women's table tennis finals to be held in 5 hours time may mean nothing much to China. Turning it back to Singapore, the entire nation is 'nationalized' into this single event that makes history by entering the finals and guaranteeing the Republic's only 2nd medal (and silver) since 48 years ago. Although there is bound to be some people who does not feel 'at home' since it's our foreign talents that rake in these successes, we need to understand that Singapore is not the only country with non-native athletes. Look at the 100m dash finals yesterday. And you only see one colour -- black, even from Netherlands.

So long as a talent, foreign or not, is helping Singapore, we need to recognize them as one of us. That's my take. And probably Money Economics helps, since the Singapore Sports Council has generously announced S$750,000 for a Silver Olympics medal and S$1.5 million for a Gold medal. Comparatively, Michael Phelps, after making history winning by 8 medals only got US$1m bonus from his sponsor Speedo for matching his predecessor Spitz 7 medals record and US$670,000 in bonuses from the US Olympic Committee and USA Swimming. Should he had played for Singapore and won 8 Gold medals, that work out to S$12 million in bonuses!

Merrill Takes $5.7 Billion Writedown, Temasek to Buy $3.4 Billion of Stock

Temasek has pumped in US$900million into Merrill again as committment of US$3.4bn worth of stock. The people there are sure optimistic about the seemingly gloomy future economy.

"Merrill said Monday Singapore's powerful state-owned investment fund Temasek was taking up 3.4 billion dollars of the offer -- but only after the investment bank compensates Temasek for losses on some five billion dollars it had already invested in Merrill this year.

The announcement came in the wake of Merrill's July 17 report that it had racked up a net loss of 4.89 billion dollars for the second quarter, another sign of the devastation of the US real estate crash on financial markets."

"The company said Monday it expects to record a pre-tax write-down in the third quarter of about 5.7 billion dollars, which includes a 4.4 billion loss on the CDOs being sold.

Merrill had already raised 15.3 billion from capital markets earlier this year, including share sales to the giant sovereign wealth fund Temasek.

Temasek's earlier investment though came with a requirement that if Merrill raised more capital within 12 months at a price lower that the 48 dollars share that the Singapore fund paid, it would be compensated for the difference.

Today's announcement meant that Merrill has to pay Temasek 2.5 billion -- which Temasek is turning around to put back into Merrill, along with another 900 million dollars."

Giving back Temasek Losses so as to gain more capital infusion.....although it sounds nice that Temasek is hedging some risk off by getting some cash back, they are investing in a company that has some serious cash problems. Then isn't getting some cash back gonna exacerbate the problem further (even though it will be pumped back)???

Merrill's a nice company, no doubt. But I aren't so sure in today's market. By pumping in more money, Temasek got itself even more entanged with Merrill. And as common sense, any capital raising efforts will almost guarantee more writedowns. Just wait and see.

On another note, Temasek's 30 year average returns is only 3%....far below industry average. Either the fund managers are useless (despite being paid so much; just by buying bonds will yield the same or more) or some of the money is flowing to somewhere you and I do not know....

MAS revise up Inflation Forecast

"SINGAPORE: Singapore’s central bank has revised up its inflation forecast for 2008 for the third time. It now expects inflation to come in at between 6 and 7 per cent from its initial estimate of 5 to 6 per cent.

The Monetary Authority of Singapore (MAS) said this is due to the impact of external developments like higher oil and food prices on Singapore’s open and trade—dependent economy.

The central bank, however, is maintaining its current monetary policy stance for a slow and gradual appreciation of the Singdollar.

MAS believes that inflation in Singapore has peaked this year. Inflation has stayed unchanged for the previous three months, at 7.5 per cent — a 26—year high. For the first half of the year, consumer inflation averaged 7.1 per cent.

In the coming months, inflation is expected to moderate because the one—off impact of the GST hike last year will stop affecting headline inflation in July.

MAS also expects global commodity price increases to be milder. Domestic cost pressures are likely to ease as the economy slows and asset markets consolidate.

Recent employment surveys have also shown that labour market pressures could be easing.
While most economists agree that inflation will come off in July, they say what is key will be the rate at which it moderates.

Irvin Seah, economist at DBS Group Research, said: "It will decrease at a slower rate compared to what we thought so earlier, because of policy—induced inflationary pressure. Having said that, oil prices recently have shown signs of moderation. If that’s sustainable in longer term, it means inflation could come off quite a fair bit."

Between April 2004 and June 2008, the Singapore dollar appreciated 23.4 per cent against the greenback — a policy move that the MAS said has had a restraining effect on consumer inflation.
It said its monetary policy tightening will continue to restrain cost and price pressures going forward.

For example, while oil prices have increased by more than 70 per cent from a year ago, domestic electricity tariffs and petrol prices rose only by around 30 per cent.

Despite the full—year inflation being revised upwards, the central bank is keeping its forecast that the Singapore economy will grow between 4 and 6 per cent this year, which some economists say is optimistic.

Alvin Liew, economist at Standard Chartered, said: "We are looking at slower second half this year due to worsening external markets affecting export demand. Already, we see that the manufacturing sector did not do very well in the second quarter and might see the weakness being continued into the third quarter itself."

A hint of that could be found in manufacturing data out on Friday.

Mr Liew said: "One of the important things we can look out for is tomorrow’s manufacturing number for June. If it comes worse than expected, then we can probably see a downward revision for the manufacturing sector again for second quarter, and then maybe we’ll see the government’s forecast range being revised down. I’m looking at probably a half to one percentage point downward revision."

Between inflation and growth risks, analysts say, inflation will remain the larger risk for 2008, although this may switch in 2009 should global growth continue to slow.
Singapore’s economy grew 7.7 per cent last year."

Now I am puzzled. For MAS to revise 3 times (and more to come I believe), how on earth can they accurately (or inaccurately) say that the one-off GST hike last year's effect on inflation will stop affecting headline inflation by this month? What kind of funny 'forecast' is this if the revision is just playing a catching game with the macro trend as a whole? Price increase seldom, if it ever did, reverse it's path. Probably it is a nicer way of saying "You guys should have been used to the price increase by now".

Inflation is now a great concern and although there are some who are optimistic that inflation is wearing off with recent oil prices declining, I am still somewhat pessimistic about the second half of this year. The 4 days rally of the asian markets are somewhat weak with the STI being unable to cross the 3000 line. At the point of typing this post, asian markets fall (again) on re-newed concerns of widening credit-market losses and worsening global economic slump. Throw in the Iranian stand-off with the USA (or basically the rest of the Western Powers) on Iran's nuclear programme, a new US president, plus the wider effect of the Fannie Mae & Freddie Mac episodes unravelling, the future remains gloomy. Then you have the cold seasons coming in another 2-3 months, which may translate to higher oil price again. A word of comfort may be the OPEC cartel seems to have weakened with Iran, the 2nd largest oil producing country, to disagree over OPEC's agreement on increasing output.

Look out for more 'Economic growth justification' from the Singapore media & government in the months to come.

It's been long

It's been a long time since i updated my blog as I was away to China for 1 month and apparently blogspot is censored in the country. I'll be writing again very soon.:)

A Poem: An Ode to Bernanke

This poem is so funny that I just have to reproduce in my blog:

An Ode to Bernanke

Ben Bernanke is our crazy Fed chairman, you see
He’s convinced that the U.S. has a full forest of money trees.

So he creates fancy dollar bills out of thin air,
Trying to save the economy from its destructive flair

The first thing he wants is to keep homeowners from defaulting
So he gives a multi-billion dollar bail out to the criminals who were assaulting.

But that wouldn’t be enough to save the economy from a bearish turn
So is it any wonder he had JP Morgan bail out Bear Stearns?

But the one thing he doesn’t realize is that his tricks won’t solve a thing.
He’s just trying to keep the economy together on just one string.

So as he prints money with no regard for inflation,
He’s convinced by doing this he’s going to save the nation.

One dollar, two dollars, ten dollars to buy a bottle of coke.
And as soon as you walk into a supermarket, the prices will make you want to choke.

So what will Ben do when he finds his plan didn’t work?
Will he be forever regarded as an economic jerk?

Will the annals of history reflect on him well?
Not in my mind – and that’s the history I’ll tell.

Whether or not you agree with the 'poet' who composes this is entirely subjective:p.

"Mr Buffet has to answer to his shareholders every year, GIC doesn't have to"

MM Lee said that in an interview by the local newspapers when consulted on whether GIC (and Temasek anyway) can afford to be more transparent. Citing 'strategic considerations' and for fear of 'dependency on pay outs' from the Government, MM Lee said it's best not to be too transparent. To be fair, Buffett is my idol, as to many millions or even billions of other people as well. And there may be a certain bias. But I do have many more questions to ask regarding GIC.

While I can understand the part on 'strategic considerations', I wonder whether it justifies the issue on transparency. While certain hedge funds and venture capitalists or private equity firms are indeed not transparent to the external world, they are fully answerable to their stakeholders. So who are the stakeholders of GIC funds amounting to more than US$300bn? You. Me. Every Singaporean. Then why aren't they answerable to us?

On the part of 'dependency' as people expects more payout: Who cultivate this dependency? While I am not complaining the government giving out cash transfers almost close to every General Elections, isn't it not the same action that is breeding more expectations from the citizens on more handouts? Admitting that it is not an easy issue to solve given the contradictory position on Singapore being a non-welfare state (to pull it from our government's lines: S'pore Inc cannot afford to offer welfare--which economically speaking is quite correct), it is a difficult yet the Government's job to ensure a balance in widening the social safety net and people's expectations. Why then are we paying them so much?

MM Lee went on to say that in comparison with the famed Berkshire Hathaway, GIC is looking at a longer term for investments. This is said so to justify the investments in the US/European banks that has registered paper losses amounting to millions of dollars for Singapore and therefore GIC will evaluate their investments in 5-10 year periods while Warren Buffett takes a shorter term view as he has to answer to his shareholders every year. This seems to insinuate GIC is far more far-sighted than Berkshire.

That statement, is fundamentally flawed. Everyone knows that Warren Buffet takes a very long term view. He likes to buy companies but rarely likes to sell. He looks for companies that can provide cashflow and more earnings indefinitely. In fact, he has held on to Coca-cola stocks longer than most people. And he does incur losses in certain areas sometimes, very much like any investor on Earth, which is clearly stated in the annual financial statements. Just that the gains are usually more than the losses. With a company racking in more than US$100bn in revenue and 1 year return of 23.297% (in USD), it would be interesting to see if GIC can even match up to that standard. To give you a perspective on how big (or how rich) Berkshire is, Berkshire's market capitalization is slightly more than US$200bn, which is almost equivalent to Singapore's GDP (PPP at 2007) .

While GIC pays millions to their board of directors (take it as the management fee--a cost my dear bloggers! for managing Singapore's funds), Warren Buffet opt to get only US$100,000 a year. Are the management in GIC liable for losses? Are their salary pegged to performance? What is the benchmark that GIC is using to evaluate performances of their management (Why would I want to pay a trader more than a million a year if he can only rack in 5% yoy return which barely covers our inflation rate)? Such information is not given to us.

In short, it is totally irresponsible to use that statement to cover up the mysterious GIC and an insult to the Oracle of Omaha.