Sunday, November 30, 2008

Obama Ticking The Right Boxes

Paul Volcker, who helped tame runaway inflation in the 1980s during two terms as chairman of the Federal Reserve, has agreed to lead a new White House economic advisory committee, President-elect Barack Obama said Wednesday. He praised Mr. Volcker as one of the world’s foremost economic policy experts.

“Paul has served under both Republicans and Democrats and is held in the highest esteem for his sound and independent judgment,” Mr. Obama said, as the 6-foot 7-inch Mr. Volcker towered nearby. “He has a long and distinguished record of service to our nation, and I am pleased that he has answered the call to serve once again.”

Mr. Obama made the announcement at his third news conference in three days. The public appearances by the president-elect are intended to show Americans that his team is focusing on resolving the financial crisis, which Mr. Obama said Wednesday demands “fresh thinking and bold new ideas from the leading minds across America.”

Mr. Volcker, 81, has been providing Mr. Obama with advice on the economy for months. After briefly considering him for Treasury secretary, Mr. Obama instead asked Mr. Volcker to lead the President’s Economic Recovery Advisory Board, a new panel to be comprised of leading figures from a variety of business sectors. The group is supposed to advise Mr. Obama on how to jump-start the economy and stabilize the financial markets.

Austan Goolsbee, a University of Chicago economist who was a leading economic adviser to the Obama presidential campaign, will lead the staff of the advisory board, the president-elect said, calling him “one of America’s most promising economic minds, known for his path-breaking work on tax policy and industrial organization.”

Volcker gained an infamous reputation during his tenure as chairman of the Fed. He assumed the position amid a five-year run of inflation caused by an upswing in oil prices when the Arabs cut off exports into the U.S. as retaliation for our support of Israel. Volcker immediately took steps to reduce the total money supply. More importantly he changed the long-time Fed policy of controlling interest rates, and simply let interest rates float to their natural levels. Businesses and farmers were paying over 20 percent interest on their debt when irate farmers stormed Washington and blockaded Fed headquarters with Volcker inside. Volcker's moves as Fed Chairman did break the back of inflation as they were intended to do. Inflation peaked at 13.5 percent in 1981 and dropped to 3.2 percent in 1983. The price was a sustained unemployment rate of over 11 percent nationally during that same period, the highest since the Great Depression. Volcker's policies were good for creditors, especially his friends in Manhattan who owned bonds. But they were harsh on the American middle class and on small business.

It is both these groups, the middle class and small business, that Barack Obama has promised not to forget with his economic recovery package. But Paul Volcker's history does not indicate a compassion for the little guy. The final Democratic economic recovery plan depends on how these two men reconcile their political and economic thoughts.

Why is Paul Volcker so important? In a speech he made in 2005, he already made some important points:
"Altogether, the circumstances seem as dangerous and intractable as I can remember."
"Boomers are spending like there is no tomorrow."
"Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."
"I come now to the heart of the problem, as a Nation we are consuming and investing, that is spending, about 6% more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day."

p/s photos: Han Ye Seul

Asia-Pacific Top Brands

Marketing Charts: Five of Asia’s top 10 brands are US-based companies, indicating the strong presence of US companies in the Asia-Pacific region, according to “Asia Pacific’s Top 1,000 Brands for 2008,” as determined by a TNS survey.

The survey, which expanded on previous years to include responses from consumers in a total of 10 markets in the region, presents an overview of the local and global brands that consumers think most highly of across sectors and geographies.

To determine the best brands in each of the product and service categories covered by the survey, participants were asked two questions:

  • When you think of [product / service / category], which is the ‘best’ brand that comes to your mind? By “best,” we mean the one that you trust the most or the one that has the best reputation in [product / service / category].
  • Apart from the brand that you have just mentioned, which brand do you consider to be the second-best brand in the [product / service / category]?

Some 3,600 people were interviewed, including for the first time consumers from Japan, Korea and Australia. Together with respondents from China, Hong Kong, India, Malaysia, Singapore, Taiwan and Thailand, they were drawn from TNS’s 6th dimension online access panels. The categories presented to each participant included alcohol and cigarettes; financial services; automotive; health; retail; food; beverages; electronic goods; media and telecommunications; and baby products, household products, toiletries and cosmetics.

p/s photos: Janet Hsieh (now there's the girl that I would marry immediately)

Friday, November 28, 2008

Rankings Of Yearly S&P500 Performance

As of the market close last Thursday, Nov. 20, the Standard & Poor’s 500-stock index was down 48.8% for the year to date.

Had the markets called it a year at that point, 2008 would have gone down as the worst year in the history of the S&P index, which goes back (in one form or another) to 1926.

The only year that even came close was 1931, in the teeth of the Great Depression, when the S&P lost 43.3%. Here are the 20 worst years in history, based on Yale’s NYSE index until 1925, and for the S&P from 1926 onward:

1941 -11.6%
2001 -11.9%
1893 -12.3%
1857 -13.2%
1837 -13.4%
1828 -13.6%
1831 -14.0%
1973 -14.7%
1920 -15.0%
1841 -16.1%
1917 -16.4%
1884 -18.5%
1839 -19.0%
1907 -21.8%
2002 -22.1%
1930 -24.9%
1974 -26.5%
1937 -35.0%
1931 -43.3%
2008* -48.8%
*Through Nov. 20.

The closest carnage to 2008 was 1974 when the S&P500 lost 26.5%, the next closest was 2002 when it dipped just 22.1%. Aaah!!! The good old days.

Many people have been saying that the current financial crisis will be at least as bad as the Great Depression. But I’m not sure many people realize that the stock market has already had the worst year in all of American history.Take from this what you may.

p/s photos: Elanne Kong Yeuk Lam

Wednesday, November 26, 2008

Temasek, Tide's Out, Skimpy Speedo

I usually do not bash Temasek (that much) except for when they irked the Thais and then the Indonesians. Temasek lost almost US$2 billion of a badly-timed US$3 billion in Shin Corp at a peak of 49.25 baht (Shin shares are now trading at around 15 baht) in 2006. The investment was not a bad one but the way they handled it (same in Indonesia) was appalling.

Being neighbours, Temasek should have known that certain assets will be viewed as sensitive and incursions will be seen as colonisation somewhat. You cannot stand behind the guise of being a professional asset manager when you are buying critical companies. Its the arrogance, its the attitude, we've got the money, so we can buy ... just like the way Singaporeans do not know how they appear in the eyes of their neighbours everytime they go traveling in the region ... we all cringe when some bloody tourists would exclaim "Waahhh, so Cheeaappp"... we know they have to be Singaporeans.

Its CEO, Ho Ching committed S$401 million in ASX -listed
ABC Learning Centres at near the peak price of A$7.30 and then averaged down at between A$1.20 and A$4.00, bringing its commitment to over S$500 million. That investment is now essentially worthless although Temasek has yet to write it down. If you examine the biggest bust ups owing to the current financial crisis in Australia, its not the usual mining company or even the highly leveraged Macquarie or Babcock & Brown which are hogging the headlines. Its ABC Learning Centres - the company is not very big, but the audacity, excesses and sheer inept management in the company that brought about its implosion are now fodder for bar talk. Temasek does not have many Australian listed assets, hence it must be close to striking the lottery for them to be persuaded to pick ABC Learning Centres. What is galling is that with the many highly paid experts in Temasek, they did not manage to uncover anything in the due diligence. Though I was loathed to believe it when Buffett said "its dumb money", but I am persuaded now.

The company also bought 19% of LSE- listed Standard Chartered in 2006 only to see the market value of that stake melt 55% by November 21st. More bank stakes include a 975 million pound stake in Barclays Bank bought at the peak of 740 pence (with a further 100 million to subscribe for a rights issue at 282 pence), which have now sunk over 70% at 138 pence.

Their stake in Merrill Lynch got converted into Bank of America, that was OK, but there are rumours that Bank of America might not be able to go through with the buyout because Merrill's assets are too toxic. Most heinous of all is its US$6.88 billion stake in Citigroup bought with a minimum conversion price of $31.34.
Citigroup has since plunged 88% to $3.71 (even though it has now rebounded to $6.30), single-handedly delivering almost S$9 billion of red ink to Temasek's books.

What all this showed is that NO ONE in the whole of Temasek saw the early subprime imploding, or the credit excesses, or the CDOs danger, or the CDS potential liability. NO ONE. You mean no one warned about even ONE OF THE ITEMS? Well, obviously not in the past 12 months, not in the past 24 months, heck, not even in the past 5 years. I am not trying to be hindsight harry here. The point I am trying to make is that Temasek has chalked up supernormal gains every year from 2004-2007 thanks largely to their global banking stakes. China, the US, India, Indonesia... you name it..they have a bank or two there. Many have lauded Temasek's superior performance then, what about now? This showed me one major fault with Temasek: its outperformance was largely the wave and trend which carried them rather than from superior stock-picking or market strategy.

If you cannot read sectors properly or have solid equity strategy or stock picking skills or market timing ... what have you then... just a bunch of overpaid people. Which is why I always say that most analysts, economists and investment bankers have one big fear when they go off to bed at night... they all have the same nightmare (I hope no one finds out how average I am!!!). Good night and sleep tight.

Overall, the paper loss on these investments has exceeded S$35 billion as of October 21st. On a population of 3m, that works out to be about S$11,666 for every man, woman and child - a household of 4 might have had S$46,666. Could be worse I guess, could have been from my country.

p/s photo: Son Dam Bi

Roubini Likes Something

NEWSWEEK: What are your thoughts on the team Obama assembled?

Nouriel Roubini: The choices are excellent. Tim Geithner is going to be a pragmatic, thoughtful and great leader for the Treasury. He has experience at the Treasury and the IMF [International Monetary Fund], then the New York Fed. I have great respect for both Geithner as well as Larry Summers. I think both of them in top roles in economics in the administration were good moves. I think very highly of them both.

What are the first things they need to tackle?
R: First one is the fiscal stimulus, because the troubled economy is in a freefall, so we really need to boost aggregate demand, and the sooner and larger the better. The second thing they should do is recapitalize the financial system. Most of the $700 billion is going to be used to recapitalize banks, broker dealers, finance companies and insurance companies. To do it aggressively and fast is going to be important.

The plan Obama has talked about includes spending on infrastructure and energy development to create jobs. How likely is that to produce long-term aid to the economy?
R: We need to do it because demand and spending and housing are literally collapsing. That will get a boost from public-sector spending: [spending on] infrastructure, unemployment benefits, state and local government aid, more food stamps. We're going to have to think larger, but I don't think you can pass most of it until January when [Obama] comes to power. We're going to have to wait, because nothing seems possible for the time being. But I expect most of his plans towill pass once the new administration is in power.

Obama is largely powerless for the next two months. What's your outlook from now through January?
R: The lame-duck session of Congress really needs to spend on unemployment benefits, aid to save the local governments and on food stamps. Those things are very short-run and are very important. It's really the most we can do for now.

Your view of the economic future is often a bit less than optimistic. What does Obama's team signal about what could be coming?
R: Look, he wants to get things done, so he's choosing a really terrific team. To me, it says that he's choosing people who have great experience. He's choosing people who are pragmatic and who realize the severity of the national problem we're facing. They're knowledgeable about markets, about the economy and the political process in Washington. These are the very best people he could have chosen. I can't look too far, but it's a very good signal of what he wants to do.

A few additional caveats on this interview, according to Roubini:

First, I told the Newsweek reporter – as full disclosure – that I had worked for Tim Geithner and Larry Summers when they were both at Treasury: I was head of a Treasury Office and the Senior Advisor to Tim Geithner in 1999-2000 who was at that time the Under Secretary for International Affairs while Larry Summers was Treasury Secretary. So some may that my positive views of the two may be biased/tinted by my working for them; on the other hand I know first hand about them and I have the greatest respect for their skills, intelligence, expertise, commitment to sound public policy and policy wisdom even if I may not always agree with all of their views.

Second, I have also to add that – as I argued in an interview with CNBC Monday morning - while I have the greatest respect for the new Obama economic team, they will inherit a huge economic and financial mess that will be extremely hard to fix even if they were to implement the most sound and consistent economic and financial policy package. This is going to be the worst US recession in decades as the strapped US consumer is now faltering. The recession train and the financial crisis train have left the station. What policy can do – at best – is to minimize the financial and economic losses and limit the extent and severity and length of the economic and financial crisis, not to prevent it.

President Elect Obama and his top notch team will inherit two wars and the worst economic and financial crisis in decades. So expect very difficult times ahead for the economy and for financial markets regardless of the best effort of Obama’s excellent economic team in trying to address these problems. Even a massive fiscal stimulus, a more rapid and coherent plan to recapitalize financial institutions and resolve the credit crunch, an aggressive plan to reduce the debt burden of insolvent household, and more aggressive and radical set of unorthodox monetary policies will not prevent a global stag-deflation in 2009 and possibly longer.

p/s photos: Kou Shibasaki

Monday, November 24, 2008

Some Direction At Last, Some Market Leadership

Well, this post is written after the plan by FDIC and Treasury on Citigroup. So, where are we now? The first thing was Obama made the right choice in appointing Timothy Geithner (please reread posting on the new Treasury Secretary). The market basically rallied over 4% on Friday over the news. Can the appointment alone charge up markets? Yes, especially in the current market situation where there is little confidence, little direction, high volatility, basically no market leadership.

The best thing for Geithner to do is to grab the markets by the neck and tell them "This is the way ahead, follow me and I will guide you towards the light (no pun intended, obviously)".
Geithner, as mentioned before is a market interventionist. He was critical in lining up the JP Morgan / Bear Stearns deal, he was instrumental in getting the funding for AIG, he tried to save Lehman but was dissuaded by higher powers ...

The market basically saw in Tim, a person who will not let things get blown out of his control. It was very easy to predict what he would do in a Citigroup situation. The new rescue package for Citigroup was assembled with Tim's input, and it was a package that tries to cover even the most extreme situation Citigroup could find itself in.
Naturally there will be many naysayers that will criticise that the package will not work.

To me, its a very substantive package, watch the shorts try to stampede out of Citigroup in a hurry tonight.
Why is the package so good? I did mention that Treasure could follow the UK prescription for Royal Bank of Scotland, whereby they injected capital for actual shares, thus controlling the bank. Instead a softer version was adopted, the Swiss version, on how they bailed out UBS. But in reality, the package is a Swiss UBS package with a subsequent evolvement to the UK RBS method as future losses, above the preset levels, will see the government absorbing the loss in exchange of an equity stake in Citi - so prediction stayed true.

First, there is the additional $20bn capital. Two, the guarantee on $300bn of toxic assets, phew. Thirdly Citi is only liable for the first $29bn of losses, as I mentioned earlier, without the package, Citi would probably have to incur losses totalling at least $50bn for the next 3 quarters. Now that has been largely eliminated.

Fourthly, most importantly, confidence is restored. Global bank run on deposits would now start to reverse. Fifthly, no dividends for 3 years (or just 1 cents actually) - this has to come from the government as management has no balls to say no more dividends (Alaweed no happy man, no feel like smiling).

The 8% payment on $7bn to Treasury is a cheap way to raise funds. This move will make it SO MUCH EASIER for Citi to go to sovereign wealth funds to tap additional capital. Mark my words, Citi will easily raise another $10-15bn within weeks, which will further boost its defence system.After the deal, Citi's Tier 1 capital ratio at Sept. 30, on a pro-forma basis assuming the October capital injection and the new capital announced on Sunday, is expected to be 14.8%. Its tangible common equity would be about 9.3% of risk-weighted managed assets, Citi said.

We have market leadership. Expect a sharp revival in Citi, and possibly a new bottom at 8,000 for the Dow.

p/s photos: Haruna Yabuki

Update On Fate Of Citigroup

This is probably not a politically correct joke, well not really a joke as it actually did happened, but hey....loosen up. A private banker called up a client telling him that Citi was a great buy below $5. The client half-jokingly said, "What, you kidding, I'd never buy an Indian bank". I guess its not just Vikram Pandit but a huge layer of the bankers at Citi happen to be Indians - I told you it was not politically correct!

Anyway, some updates on the probable fate of Citigroup. The shorts are doing it to Citi, make no bones about it. Will Citi go bust? Very unlikely. The bank has $2 trillion worth of assets, the question mark is how much will have to be written down. Hence even below $20bn in market cap, Citi may not find buyers for the whole bank unless they come with Treasury backing and guarantees.

Citi has kind of been off the radar when Lehman and Bear Stearns were collapsing because of their strong deposit base, in particular from outside of the US. It has some $880bn in deposits, but the scare over the last few days probably would have seen at least one third of those deposits being pulled out. I doubt very much Citi can function without some kind of help over the next few days.

The interesting bit was that the company bought back $17.4bn in assets it could not offload under the SIV. If you were really in trouble, would you do that as a priority?
Citi saw Alaweed upping his stake from 4% to 5%, that didn't help. Citi got a $25bn injection from TARP, that seems to be insufficient. The estimated further writedowns over the next 3 quarters could come up to another $50bn. Take that with a much reduced deposit base, and Citi would find it very hard to raise funds or have sufficient capital to do business. While HSBC or even Royal Bank of Canada would have the muscle to buy Citigroup now, none will try as they will not get any special treatment from the US.

For JP Morgan or Morgan Stanley to buy, they would probably only do it with guarantees from the Treasury. Following the hoopla over the deal with JP Morgan and Bear Stearns, I doubt the Treasury would want to take that path again.

A seizure by FDIC would be bad news generally as Citi would be broken up and sold in parts. A most likely scenario now would be for Treasury to become the majority shareholder of Citigroup by pumping in at least another $50bn in exchange for new shares. Taking a leaf out of UK's experience with Royal Bank of Scotland, that seems to work. Treasury could then slowly sell down its stake when Citi gets out of trouble a few years down the road.

As it is, Citi is a unique animal. Its reach is far and wide. If it was Bear Stearns or WaMu, nobody outside the US would bat an eyelid. But mention Citigroup, it trades and do business with almost every corner of the globe. The international pressure on Paulson and Bernanke to "save" Citi would be overwhelming.
If that route is chosen (as I think is most likely), we should see it trading back at $10 minimum, thanks also to the short squeeze on the shorts. For the time being, that seems to be a realistic solution.

p/s photo: Nozomi Sasaki

Friday, November 21, 2008

What Should Happen & What Is Likely To Happen

General Motors

What Should Happen
- Allow the company to go into Chapter 11 or what we call bankruptcy. Then the company will have real negotiation leverage and the unions will really have to listen and make concessions. The government can then step in with some funding but call the shots. Force the merger of General Motors and Chrysler. All outstanding car warranties will be guaranteed by the government via a separate vehicle. Following huge concessions made by the union, the selling down and dismantling of parts, the reworking of cost savings with the 2 companies... maybe, just maybe they can survive.

What Is Likely To Happen
- Democrats will probably approve a US$25bn bailout when they return on December 8, but a viable plan is expected from the automakers. Expect Chrysler to quicken talks with GM to hash a merger to get the US$25bn bailout plan approved. Short term feel good, but without bankruptcy, the unions and their demand swill stay the same. Its the liabilities and claims by employees on the company's balance sheet which will always bring the company down. The lifeline will give then a few months grace but the end result is bankruptcy.
The trouble is that with the US$25bn bailout, the unions will not lower their rights and demands... you need to put the company into bankruptcy to leverage your negotiations. Sink or swim.


What Should Happen
- JP Morgan or Morgan Stanley should step up to buy Citigroup, with the Treasury guaranteeing maybe US$30-50bn in losses. That will calm markets. Its not likely Citi will be able to remain independent for long on its own. The amount of toxic assets is US$80bn, and we haven't even looked at the fallout on funds being tied to Lehman Brothers. Citigroup has another shoe to drop, credit card debts, which will implode as well. A merger would see a bid of at least US$20 per share. It will further reduce counterparty risks in dealing with Citigroup.

What Is Likely To Happen
The company will be taken over by FDIC to prevent a bank run, especially from global depositers. Their liquidity ratios are seriously questionable at this point. The result would be a total break-up of the group. JP Morgan may still end up with the commercial banking side in a break up sale. As Citigroup is trading at barely 1/4 book value, a break up sale should see at least a US$10 value to its shares.

Other Potential "Bad Developments" In Coming Weeks & Days

a) GMAC running into deep trouble.

b) GE Capital running into deep trouble.

c) The merger between Bank of America and Merrill Lynch running into problems owing to ML's excessive exposure to toxic assets.

d) Nobody steps in to help Citigroup, and this time global effects will be felt as Citi's exposure is more pervasive globally.

e) Markets switch to look at credit cards implosion, dragging Citigroup and Amex into deeper trouble.

Still, we are seeing possibly the "peak in selling" here, expect 7,000-7,300 to be attract strong buyers for the longer term and should hold up well there. Asian markets should find good buying support now as there is almost zilch holdings by foreign funds - nothing left to sell now literally. Its not hunky-dory, but those with at least a 6 montn view may nibble.

p/s photos: Li Bing Bing

The ONE PERCENT's Significance

In August consumer prices dropped 0.1% from the previous month. In September it was unchanged. The just released figure for October saw a 1% drop from September. This one percent month on month decline is very significant. Firstly, forget about inflation, we now have to seriously talk about deflation. We are only starting to see consumer prices feeling the effects of months of real estate price plunge and stock price decimation. A trend once established is hard to reverse. You people know how difficult prices take to come down. When it goes up, it goes up quickly.

When trade slows, when inventory builds up, consumer prices are very sticky in coming down. The fact that it did not just ease down is highly critical. One percent month on month decline has never been registered in the US, except during the Great Depression. Take a few seconds to reflect on that one percent now.

Proper tracking of consumer prices only started in 1947, and this one percent was the largest ever since tracking started. Deflation has many implications - the one percent decline shows how serious every sector is facing the crisis, it is felt in every sector basically. Consumers are delaying purchases in a deflationary environment. That's no good. The Fed is now setting its interest rate target at 1%, and there is a very good chance we could see zero interest rates before things turn around.

When I studied economics, zero inflation is not a good thing. It indicates that things are not moving, things are dying, industries will constrict, there will be cost cutting, there will be layoffs, there will be a great incentive to hoard and save.

The positive would be the one percent will cause the Fed to speed up spending policies. The Fed would be moved to lower rates faster than it need to. The Fed will have to pump liquidity into the system with more urgency.

Usually even in a downturn the consumer prices would be easing down month on month, not by the one percent we just saw. That indicates that the trend has just started and will see at least a few months of negative consumer prices month on month. That one percent will be enough to cause all commodities producers to drive down inventory, sell at all cost, even at losses, stop plants functioning, even if it means lowering capacity utilisation and incurring losses. 7,300 here we come. CPO prices, Rm1,200 here we come.

p/s photo: Grace Park

Thursday, November 20, 2008


You heard it here first, the next biggest bank in the world, Citi-Morgan ... it makes a lot of sense for JP Morgan... but investment bankers on both sides will shudder because there is almost an exact replication, thus any merger will see at least 30%-40% of investment banking staff being cut. JP Morgan would value possibly the best global commercial banking franchise... provided the Treasury steps up and guarantee one or two hundred billions in losses (ala Bear Stearns). But I am getting ahead of myself, it may happen only.

$34.48 billion

Citigroup’s current market capitalization.

$126 billion

Citigroup’s market cap in April 2008.

$178.59 billion

Citigroup’s market capitalization one year ago.

$80 billion

The value of risky “legacy” assets that Citigroup is moving off its trading portfolio and into its investment portfolio or marked “available for sale.” These assets include collateralized debt obligations, leveraged loans, mortgage securities and auction-rate securities, according to Bernstein Research. They likely would have qualified to be bought by the government under the first TARP plan to buy troubled assets.

$8 billion

The value of legacy assets Citigroup kept in its trading portfolio.

$3.5 billion

The estimated fourth-quarter writedown that Citigroup might have to take on those $80 billion of assets when it transfers them, according to Bernstein Research.

$2.8 billion

Citigroup’s most recent loss, in the third-quarter.

$2.2 billion

Citigroup’s loss in the second quarter.

$9.83 billion

Citigroup’s loss in the first quarter.


Citigroup’s net income per employee.


Citigroup’s return on equity — a measure of management effectiveness — as of Sept. 30.


Citigroup’s return on equity as of Sept. 30, 2007.

$800 million

The price that Citigroup paid to acquire Old Lane, Vikram Pandit’s hedge fund.

$165.2 million

What Vikram Pandit earned from the sale.

$202 million

Citigroup’s first-quarter writedown on Old Lane. The bank closed the fund in June.


Yesterday alone, Citigroup slumped a record 23 per cent to US$6.40. This beat the 21.7 per cent drop it registered during the Black Monday crash in October, 1987. Citigroup just a few days back announced it was cutting 52,000 jobs reduced its workforce to around 300,000 worldwide. When we see share price collapses in Washington Mutual, Countrywide or Wachovia, we watch things unfold as spectators. Those things don't hit Asia. But Citigroup does.

In January, the Government of Singapore Corporation (GIC) had invested US$6.88 billion in Citigroup via a convertible bond issue. Today regional Asian banks were whacked. Just considering the massive bank transactions between Citi and other banks is sufficient to make investors reconsider about counterparty risks and systemic risks. Will Citibank survive??? Citibank has an unquestionable franchise globally in banking, possibly only surpassed by HSBC. It still has enormous deposits, though much of it is from outside of the US as invetsors have pulled much of their deposits from any and every US bank. The developments yesterday will probably cause a substantial number to yank their Asian deposits out of Citigroup now. Things can snowball very fast. Fear is the worst thing when it comes to potential bank runs, then suddenly you cannot get any credit lines and things freeze up.

The selldown in Citigroup was due to Henry Paulson changing his TARP plans. Now he is not going to use the funds to buy toxic assets (as well he shouldn't because that does not add to the banks' capital at all). Hence the credit default swap market where CDS premiums on Citi has now widened to 360 bps – meaning that investors are willing to pay more to get protection against possible default on Citi. A CDS spread of 360 bps means that an investor must pay US$360,000 to get US$10 million protection on Citi.Citigroup has about US$150 billion - US$200 billion worth of distressed financial assets. Remember that Citigroup still has a lot of shit tied up with Lehman Brothers (please re-read Lehman Brothers, The Rosetta Stone posting). Now that was supposed to be taken off its book, but has since been thwarted by Paulson.

The bigger reason for Citigroup's share price collapse was the announcement that it would buy about US$17.4 billion in assets from structured investment vehicles, or SIVs, that were affiliated with Citi. It said that the move — which it called a “nearly cashless transaction” — would complete the bank’s wind-down of these troubled investment pools. Citi was a pioneer in the business of SIVs, which once made lots of money by issuing short-term notes to invest in longer-term securities with higher yields. They traditionally resided off the balance sheets of the banks that created and advised them. This meant that the banks are now starting to unind the SIVs on their own as no help is now forthcoming from the Treasury.

Citi now worth only US$34 billion, looks like JP Morgan could make a bid for Citigroup as well.... again with Treasury standing behind JP Morgan probably guaranteeing losses of up to US$100bn... one winner, many losers. After Paulson's mistake to let Lehman Brothers fail, they will not let Citigroup go down.

Cash is king, but bloody hell, where to put the cash... certainly not in a bank!


p/p/s ... actually Citi is a very very good bet now at $6.... after Lehman Bro, Treasury will NEVER let another inv bank fail ... which means.... merger or bailout.... merger = ppl like JP Morgan will have to pay btw $15-25 per share, close to BV.... with Treasury guaranteeing a couple of hundred billions.... so there is a 200%-400% upside, its a calculated bet

p/s photos: Aya Kiguchi

Why Ken Heebner Is Better Than Buffett

The best mutual fund manager around is Ken Heebner of Capital Growth Management. The statement above is a big one. Everyone worships Warren Buffett, I am not saying he isn't good, Buffett is very very good, right at the top. Unfortunately, Ken beats him in a poker heads-up match.

Fortune: Just how good has Heebner been? We may well be witnessing the most dazzling run of stock picking in mutual fund history. Since May 1998, Focus has an average annualized return of 24%, the best ten-year record of any U.S. mutual fund, compared with only 4% for Standard & Poor's 500. Focus, which has $7.4 billion in assets, is already up 15% in 2008 (as of May 19), but it is 2007 that will be remembered as Heebner's pièce de résistance. Fueled by big bets on energy, fertilizer, and metals, Focus soared 80% last year, vs. 5% for the S&P 500. "I told Ken it was like he was walking between the raindrops," says CGM president Bob Kemp, who oversees sales and marketing at the firm, of the year Heebner had in 2007. "It amazes even us." Last year marked the fourth time since 2000 that the fund returned 45% or better. And it's not as if Heebner has needed the big years to make up for a lot of losses: Launched in late 1997, Focus has had only one money-losing calendar year (2002).

Peter Lynch's 14-year tenure at Fidelity Magellan has long been the gold standard for mutual fund excellence. During Lynch's best ten years - August 1977 to August 1987 - Magellan recorded an average annual return of 36%, according to fund tracker Morningstar. It's a remarkable achievement, but even Lynch acknowledges that he was backed by a strong tailwind. The S&P 500 returned 19% a year over the same period. In other words, Lynch beat the market by 17 percentage points a year during his heyday. Ken Heebner has beaten the market by 20 points a year during his.

And Focus isn't the only Heebner-managed fund that's excelling. CGM Realty (a sector fund), CGM Mutual (a balanced fund that owns stocks and bonds), and CGM Capital Development (closed to new investors since 1969 and soon to be merged into Focus) have been standouts too. Realty boasts a 22% annualized return for the past ten years, sixth-best in the mutual fund universe, according to Morningstar. It's also the only fund in its category that's been bucking the real estate slump. Realty's one-year total return: 34%, vs. 6% for its nearest rival.

In December 2000, he began buying homebuilders like D.R. Horton and Lennar, convinced that falling interest rates would be good for housing. The stocks went on a tear, and by 2004, Heebner's stake in the sector accounted for 19% of assets in Focus and 79% in Realty. But toward the end of 2004 he grew uncomfortable with the spread of what he termed "funny-money mortgages," and by January 2005 - mere months before the industry started to collapse - Heebner had sold off every homebuilder share he owned. Heebner used his homebuilder profits to load up on oil and coal stocks, positions he'd started to establish in 2004.

In August 2005, Heebner doubled down on commodities by taking big stakes in copper miners Southern Copper and Phelps Dodge. The price of copper - and of copper stocks - doubled in a little over a year.

In November 2006 he built large positions in fertilizer companies Mosaic and Potash Corp. of Saskatchewan. This time the stocks quadrupled.

In October 2005 he shorted mortgage lender Countrywide. Heebner was early on that one, but he stuck with the short for two years, and his conviction was rewarded in 2007 when Countrywide collapsed from $40 to $8. By then, Heebner had short positions in three more drain-circling mortgage lenders: BankUnited, IndyMac, and FirstFed Financial.

Heebner actually began 2007 with a quarter of Focus's money invested in five Wall Street banks: Bear Stearns, Citigroup, Goldman Sachs, Lehman Brothers, and Merrill Lynch. The holdings could have proved disastrous, but by June - before the credit crisis really snowballed - he was out. "How do you explain genius?" muses Douglas Pratt, a former Invesco fund manager who was an analyst at Loomis. "Ken just sees things others don't."

For better or for worse, the hyperactive trading has always been one of Heebner's calling cards. The turnover rate in CGM Focus, which typically holds 20 to 30 stocks at a time, was a whopping 384% last year, which in theory means he traded enough to buy and sell the entire portfolio nearly four times.

To be fair, we still have to see how Ken's funds performed over the critical Sep-Nov 2008 period. I checked and the fund was down about 1/3 since June 2008, its bad but not that bad. Fair is fair, even Buffett's stock is down, though not by as much. Its not fair to take a 3 or 6 month window to assess someone's performance. Ken's track record is proven over 11 years, and has ridden out the LTCM shit, the internet implosion, the Enron combustion, and now this.

Why Heebner is better than Buffett:

a) Warren Buffett is a pure buy-and-hold kind of person. He uses time to his advantage. Not that its bad, its just not as savvy and pure like Heebner.

b) Ken Heebner not only pick stocks and sectors, he maxes the bets by timing as well. Everybody knows that to pick a good sector or a good stock is easy, market timing is near impossible. Ken has been able to get them right probably 4 out of 5 times and usually within a 6 month time frame.

According to a significant article in WSJ, Buffett did spectacularly well in stock picking in his first 20 years. However, that magic wand seems a bit deflated since then. Much of the outperformance had been due to his "brand name" and its ability to negotiate super-duper deals ala the recent Goldman Sachs and General Electric deals.

WSJ: For the first two decades of his career, Mr. Buffett built the bulk of his fortune through his investing prowess, producing one of the best long-term track records of any money manager in history. More recently, however, Mr. Buffett has succeeded not through investing prowess alone, but also through exclusive deals that have come to him because of it.

Only a part of Mr. Buffett's market-beating performance has come from stock-picking. Even more of his edge has been generated by the operating subsidiaries of his Berkshire Hathaway Inc., like Benjamin Moore paint and Geico insurance. "There's no question about it," Mr. Buffett told me during the week. "Certainly over the last decade at least," the earnings of Berkshire's operating businesses "have grown at a much faster rate than the [value of the] marketable securities per share."

It is a lot harder than it used to be to measure just how good a stock-picker Mr. Buffett is. When I asked him if he knew how well Berkshire's stock portfolio has done in recent years, he answered: "I've no idea what the rate of return would be. But, knowing myself how hard it would be to do the calculations right, I'm suspicious of anybody's numbers."

An outsider, then, can barely get in the ballpark. Since the end of 1988, Berkshire's stock portfolio has grown from $3.56 billion to $69.51 billion. That is a spectacular average annual increase of 16.5%, far surpassing the 10.5% annualized return of the Standard & Poor's 500-stock index. Of course, this calculation is only a crude approximation, since it ignores the cash that Mr. Buffett added in -- and moved out -- along the way.

Over the same period, the growth in Berkshire's book value per share, which reflects all of Mr. Buffett's activities, not just his stock-picking, was 19.9%.

In other words, Mr. Buffett's skill at picking publicly traded stocks pales alongside the value he has added to the company through other means.

As recently as 1995, 73.5% of Berkshire's total assets consisted of a portfolio of publicly traded stocks that (at least in theory) any investor could have replicated. As of June 30, though, Berkshire's stockholdings made up just 25% of its total assets.

Mr. Buffett's stock picks used to drive the train; lately, they are more like the caboose. He has been buying private firms outright and landing "sweetheart" deals in public companies.

Since the beginning of 2006, Berkshire has spent nearly $17 billion buying private companies lock, stock and barrel, including an Israeli cutting-tool maker and a distributor of electronic components.

Meanwhile, on the sweetheart front, in 2008 alone Mr. Buffett has sunk $5 billion into Goldman Sachs, $3 billion into General Electric Co., $3 billion into Dow Chemical Co. and $6.5 billion into the merger of Mars Inc. with Wm. Wrigley Jr. Co. -- all with preferential terms.

Twenty years ago, Mr. Buffett struck similar bargains with companies whose quality ranged from purebred Gillette to mutts like Champion International, Salomon Brothers and USAir Group. His results were mixed. The lesson here is that even Mr. Buffett learns lessons. In his latest round of sweetheart deals, he gets a generous upside and virtually eliminates any downside, a "heads I win, tails I win" structure that other investors can only dream about.

Whether he buys stocks in what he calls the "auction market" or private businesses in the "negotiated market," Mr. Buffett tries to secure a margin of safety. That term, defined by his mentor Benjamin Graham, means that the price is so far below a business's underlying value that severe loss is improbable.

"We do try to buy our businesses like we buy our stocks," Mr. Buffett told me, "and buy our stocks like we buy our businesses." By that he means, among other things, that he wants to understand how the enterprise generates cash, how well-managed it is and whether its customers would stay loyal even if it raised the prices of its goods or services. Note carefully: None of these factors are contingent on the current price of the stock.

"Being a businessman makes me a better investor and being an investor makes me a better businessman," Mr. Buffett explained. "Most businessmen limit themselves to their own field, and most investors don't really think about businesses. And many businessmen are semi-oblivious to the yardsticks other people use outside that field. I'm always comparing everything to everything else. The question I want to answer is. 'Where do we get the most for our money in something we can understand?'"

"I prefer, and [Berkshire Vice Chairman] Charlie [Munger] prefers, the permanent ownership of [private] businesses," Mr. Buffett added. "That's been my focus for well over 20 years. But it's just that sometimes, marketable securities are so much more compelling." Mr. Buffett didn't say whether he thinks now is one of those times, but he did state publicly earlier this month that "I've been buying American stocks."

Any investor who picks stocks can try to think like Mr. Buffett and, as he pointed out, "the individual actually has an advantage over us, because their costs of buying and selling [stocks] are a helluva lot less than ours." But that advantage applies only if you actually can think like Mr. Buffett. Above all, there is much more to his success than stock-picking alone. Throughout Mr. Buffett's long career, he has changed tack repeatedly. At this point, he is on a course most investors will no longer be able to follow.

p/s photos: Warattaya Nikulha

Wednesday, November 19, 2008

Fallen Idols

If you have been losing money over the past 12 months, fear not, you are in good company. People getting paid huge six figures have been performing just as badly, if not worse. This has been Wall Street's year of the fallen idols.

WSJ: Marty Whitman, the legendary septuagenarian who co-manages Third Avenue Value, has seen crises come and go. There are few you could trust more in a panic. But his fund has almost halved this year. Bill Miller, the famous manager at Legg Mason Value, has fallen by nearly 60%. And that's not even the worst of it. Miller's more flexible, go-anywhere fund, Legg Mason Opportunity Trust, is down by two-thirds since the start of the year.

Ron Muhlenkamp at Muhlenkamp, Wally Weitz at Hickory, Manu Daftary at Quaker Strategic Growth, Richie Freeman at Legg Mason Partners Aggressive Growth, Ken Heebner at CGM Focus, Christopher Davis and Kenneth Feinberg at Davis New York Venture Fund, Will Danoff at Fidelity Contrafund, Saul Pannell at Hartford Capital Appreciation: They've all lost about 40% or more. Some have nearly halved.

It is a shocking bloodbath. These are managers with some of the highest reputations on Wall Street. They have beaten the Street over many years, even decades. And even they got shellacked. What chance did you have?

Even most of those who anticipated a crash got pummeled. Bob Rodriguez at FPA Capital has been very bearish for years, and was holding large amounts of cash in the fund. But he's still down 36%.

The picture for Warren Buffett looks somewhat better, although he swung from $3 billion investment profits to $1.4 billion losses in the first nine months of the year, while net earnings more than halved. Shares in Berkshire Hathaway have fallen about 31% since Jan. 1.

Those who look good include John Hussman at Hussman Strategic Total Return, who is down just a few percent. And Jeremy Grantham at GMO, who predicted much of the meltdown. His GMO Benchmark-Free Allocation Fund, an institutional fund that has a pretty free rein on what to hold and what to avoid, has still lost 11% so far this year.

There are three long-term lessons here for ordinary investors.

The first is that if the smartest and best fund managers can't successfully anticipate a crash with any degree of confidence, you can't either. Time spent trying is time wasted.

The smart money rarely spends much time very bearish, and with good reason. In practice it is almost impossible to predict a crash. And even if you are right about the direction, you will probably get the timing wrong. That may end up compounding your losses instead of preventing them. John Hussman is among very few who have gotten this one right. I know at least two superstar managers who correctly anticipated a blow out, and moved heavily into cash… in the fall of 2006, a year too soon. Markets soared instead.

I also know of at least one portfolio manager who's been predicting the U.S. credit implosion for at least seven years. Prudent Bear has been betting on falling shares (and rising gold) for a long time. It's finally getting its reward: It's up about 37% so far this year. But investors actually lost money between 2003 and the end of 2007, while the rest of Wall Street rose 70%.

And remember that investing is a long-term game. This has been the worst financial bloodbath since 1929. Yet Ken Heebner (p/s: to me he is much better than Warren Buffett) is still up more than fivefold over the past ten years, even after factoring in this year's carnage. Mr. Daftary has more than doubled investor's money. Many others are up 50% or more over that time.

The best an investor can do is to look for value, prefer unfashionable assets over fashionable ones, and avoid chasing past performance.

As previously observed here, everything has now fallen. Inflation-protected government bonds. Munis. Gold stocks. The whole shebang. Eighteen months ago, every single asset class was expensive. Today it's possible that almost every single asset class – with the possible exception of regular Treasurys - is cheap.

p/s photos: Elanne Kong

Tuesday, November 18, 2008

Its New York, Baby

I made my first trip ever to USA, New York actually last month. Was waiting for the whole trip to sink in before I put up my trip experience on my blog. I wasn't looking forward to it as I had a disjointed view of USA. Love the culture and entertainment, but was miffed over its foreign policy. But I had to go there for a short conference, and after flying the whole day, I better extend my stay and give it a try.

Anyway, I found out that they had made a musical out of my #1 comedy film of all time, Young Frankenstein... so it couldn't be all bad. I am a big fan of musicals but I only get to see those in Sydney and Melbourne mainly. Plus I was going to see a couple of real Dalis for the first time, that can't be bad as well.

I went by ANA as I wasn't going to fly straight for 24 hours, and I spent a few days in Tokyo on transit. New York hotels must be the most expensive in the world. I searched high and low on the net and I needed a decent 3 star minimum and near Times Square, the best was this place called Stayz, the internet rates were US$330 per night. But it was just less than 30m from TKTS (the place where you can buy half priced theater seats). Best discovery, my room in New York was smaller than my room at Washington Shinjuku Hotel. There you go, rooms (for US$330 before taxes) are smaller than in Tokyo, and I paid just US$200 for my Tokyo hotel room. Go figure.

After a couple of days, my whole view of USA and New York changed completely. I was very wrong, I now think New York is possibly the best city in the world, surpassing Sydney. Its the energy of the place. The people were fantastic too, even throw in your loud old Jewish retirees. I think its safe to say that three quarters of all service staff in New York are either Latinos or African Americans, I think the former make up a much bigger percentage.
Plus I think the media portray Americans in a certain way. They are really not that loud or rude, not more than most of the cities I have been to, ... and African Americans are not lazy or trouble makers in general, many were happy employees and had a nice disposition. Sure, I think you would get pockets of bad hats in Queens or violent Latino gangs in certain areas of LA, but thats the same everywhere, you just don't go there.

Greatest discovery: New York is a shopping heaven, even better than Hong Kong, much cheaper than KL or Bangkok. You can get stuff like Skechers shoes for under US$60, your Samsonite cases at just 50% of the prices you see in Asia. I walked into Montecristo, a huge cigar shop on Fifth Avenue, half thinking that I won't be able to buy anything. I was like a kid in a candy store. They don't have Cubans, and though I smoke 90% Cubans all the time, I was up to date with the top cigars from Honduras, Nicaragua, Brazil and Ecuador... plus I know what they retail when they ever do come to Asia (HK, KL and Singapore to be specific). OMG, the cigars were so cheap. To the Americans, it probably is expensive because they are so used to pay just US$1-4 per stick, while Asian smokers pay US$12-20 per stick of Cuban. I grabbed a couple of boxes of La Gloria Cubana Series R for just US$160 per box, the same box would have set me back RM900 minimum. The moment I got back to my room, I cannot tahan, I went straight back and bought another 4 boxes of CAO, Padron and La Gloria (again). I knew I was risking it carrying 6 boxes of cigars back to KL, but its worth the risk.

There is one big drawback for me in New York, there's no bloody place to smoke. Well, at least you can smoke in the streets... better than Tokyo... there you now cannot smoke while walking. Even out in the open, you can only smoke in designated areas in Tokyo. They are marked in yellow lines and you have to be in that circle to smoke... how humiliating... its like dogs being allowed to poop there.

A tip on getting half priced tickets at TKTS, the queue starts at 3pm and only for shows on the same night. If you queue early, you still be looking at an hour's wait to get your tickets. The trick is to go to the booths at 7.40pm as all shows start at 8pm, but all theaters are just less than a 10 minute walk. You get there at 7.40pm, you don't have any more queues. Got my Young Frankenstein ticket, it was absolutely fabulous.

Second night, I got a half priced ticket to see a stand up comedy club show, it was great fun. Did that for the third night as well. I am not the type that go to see the actual sights, so no Empire State or Statue of Liberty for me.. for me to get to know a place I rather walk and move around and immerse into the crowd and get a feel of the people, their energy and disposition.

The other great thing is breakfast in New York, I think they have perfected breakfast there. My favourite place was Cafe Duke, imagine Uncle Ho's place only 5 times bigger, and they have 3 huge kitchens and hundreds of sodas, fruit juices, about twenty different salads (eat in or take away), and wonderful drinks from around the world. One serving freshly made bagels with your choice of over 15 toppings. The second one was a traditional breakfast kitchen serving, bacon, eggs any way you want and with various types of sausages cooked right in front of you. The third station was the best, it serves think pizza bread and you can choose from over 20 toppings (pastrami, various cheeses, chorizo, various types of ham, veggies and various other condiments), then they toast it in a wood burning oven... OMG. You can create your own pasta, have great deli cuts, great soups, specialty sandwiches, special wraps, various grilled sandwiches... even Japanese and Korean dishes. Plus great coffee at 7am... I was there every morning practically.
They have a few places nearby: 545 Broadway& 116 Mercer Street, 140 W & 51st Street (btw 6th & 7th Ave) and 1450 Broadway & 41st Street.

Would I go to New York again in spite of the 24 hour journey, well, yes... I probably still want to break up the flight, maybe Stockholm, Tokyo or San Francisco. I still want to get to see the return of Gypsy and the new fabulous musical Jersey Boys (about Frankie Valli & The 4 Seasons), bought the soundtrack this time around. And I will not bring much luggage the next time... will buy the cases there to bring back stuff. I calculate that if I buy 10 boxes of cigars, I would have saved enough for free accommodation anyway. If you love musicals, stand up comedy, shopping... its for you... I also love the book stores and the DVD shops where I got to search through my favourite movies and stand up comedians DVDs that you cannot get here (e.g. Gene Wilder movies such as Blazing Saddles, Silver Streak, Stir Crazy, World's Greatest Lover ... my fav Sarah Silverman DVDs, Frank Caliendo, Gilbert Gottfried, etc...).

Could I work and live in New York..., sure but for a corresponding lifestyle maintenance, I would need an annual salary of US$240,000 ... its the housing that kills you.

p/s photo: Kwan Usamanee

UBS Joins Goldman, Pressure On The Rest

IHT: UBS on Monday joined Goldman Sachs in saying its top executives would get no bonus this year, as public scrutiny of bankers' compensation intensifies amid the taxpayer rescue of the financial sector.

UBS said its chairman, Peter Kurer, chief executive, Marcel Rohner, and other members of the executive board would receive only their fixed salaries this year and that all other employees would have their 2008 bonuses reduced. The bank, based in Zurich, received a Swiss government bailout of about $60 billion in October after losing nearly $50 billion since the the credit crisis began last year.

UBS said that beginning next year, top executives would be paid according to a long-term compensation model that "rewards realized value creation and takes business risk into account." In profitable periods, the executives will be paid performance-based variable compensation, but in hard times, no bonus will be paid. In addition, it said, "a 'malus' can be deducted from bonus accounts" when performance merits.

UBS made the announcement a day after top executives at Goldman Sachs sent a request to the company's directors asking that they receive no bonus pay for their work in 2008, a company spokesman said. Their request was granted, he said.

The moves by UBS and Goldman Sachs turns up the heat on their competitors, including Morgan Stanley, to take similar action as they decide on year-end bonus figures in the coming weeks. Last month, Josef Ackermann, the chief executive of Deutsche Bank, announced that he would forgo his bonus this year as "a very personal sign of solidarity."

"We may see more of such bonus decisions at the top of the tree," said Andrew Oliver, managing director at Profile Search & Selection, an executive search firm in Hong Kong, on Monday.

The decision by Goldman Sachs could also ease political pressure and reduce adverse reaction to what is expected to be a bleak fourth-quarter earnings report in December, including perhaps the bank's first loss of the credit crisis. Goldman's bailout package includes some strictures on executive pay, but the industry does not view them as especially strong.

It comes after banks worldwide have been awarded or promised hundreds of billions of dollars in taxpayer bailouts. Numerous European officials, including President Nicolas Sarkozy of France and Angela Merkel, the German chancellor, have called for limits on bank executives' pay.

In the United States, public officials including the New York attorney general, Andrew Cuomo, and Representative Henry Waxman, a Democrat of California, have been warning banks not to use any taxpayer money to award bonuses to executives. Industry lobbyists and interest groups have also warned executives at the banks that any big pay numbers this year could generate a significant public backlash.

There is a widespread belief that the way Wall Street awarded bonuses in recent years helped feed the risky behavior that eventually created big losses on exotic debt securities and helped create the current crisis.

UBS acknowledged as much Monday, noting that a report it submitted in April to the Swiss Federal Banking Commission concluded that "disproportionately large risks" had been assumed within its investment bank and that the bonuses there, linked to earnings, "had not been sufficiently tied to the amount of assumed risk. In addition, the bonus payments were calculated based on short-term results, without sufficient appraisal of the quality or sustainability of those earnings."

Morgan Stanley and other banks are still formulating bonus figures. Morgan Stanley's chief executive, John Mack, took no bonus last year. Morgan Stanley, which took a loss in the fourth quarter last year but has been profitable all of this year, declined to comment Sunday. Morgan Stanley posted better results in the third quarter than Goldman Sachs.

In September, Goldman Sachs and Morgan Stanley transformed themselves into bank holding companies that take deposits, take less risk and are subject to more government oversight. That new structure may limit their ability to generate big profits, because they cannot use as much borrowed money to make big investment bets.

In the past several years, Goldman Sachs has posted some of the biggest profits and paid out some of the biggest bonuses in Wall Street history. The company's chief executive, Lloyd Blankfein, received a salary and bonus package last year worth $68.5 million.

Goldman Sachs paid its two co-presidents, Gary Cohn and Jon Winkelried, about $67.5 million each last year, more than most chief executives. All three will receive no bonuses this year.

Others forgoing bonuses at Goldman Sachs will include the chief financial officer, David Viniar, and the vice chairmen, J. Michael Evans, Michael Sherwood and John Weinberg.

p/s photos: Nok Ussanee Wattanathana

Monday, November 17, 2008

Roubini On Why US Consumers Are In For A Long Slump

20 Reasons Why the U.S. Consumer is Capitulating, thus Triggering the Worst U.S. Recession in Decades

Today’s news about October retail sales (-2.8% relative to the previous month and now down in real terms for five months in a row) confirm what this forum has been arguing for a while, i.e. that the U.S. has entered its most severe consumer-led recession in decades. At this rate of free fall in consumption real GDP growth could be a whopping 5% negative or even worse in Q4 of 2008. And this is not a temporary phenomenon as almost all of the fundamentals driving consumption are heading south on a persistent and structural basis. Consider the many severe negative factors affecting consumption. One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:

Goldman Sachs, The Hated Kid On Wall Street

Blankfein, presidents and co-chief operating officers Jon Winkelried and Gary Cohn, chief financial officer David Viniar, and three vice chairmen -- J. Michael Evans, Michael Sherwood and John Weinberg -- asked the board's compensation committee that they not receive a bonus, spokesman Lucas van Praag said. The compensation committee met and agreed, Praag said.

The executives will only be eligible for a base salary of US$600,000 (HK$4.68 million) each, the Wall Street Journal reported. Last year, Blankfein made US$68.5 million, Winkelried and Cohn got US$67.5 million, and Viniar got US$57.5 million.

Goldman Sachs, not being badly hit by the current financial turmoil, is now leading the way for the rest to follow. This will make everyone on Wall Street to hate them, especially the senior management at poorer performing firms such as Merrill Lynch and Citigroup - how are they going to be able to ask for a decent bonus now. Having said that the top guys at Goldman knows when to play their cards right. When you have over US$60 million last year, its quite pointless to fight for US$20 million. Might as well forgo all, win enormous credibility in the market place for leadership, making the tough decisions, gaining respect from other players. The only enemey they have is Vikram Pandit, who will be cursing them in hushed tones... how will he get his bonus approved now?

p/s photos: Ayumi Lee

And Now For Something Completely Different ...

Something completely different, ... well not really. I don't have something substantive on financials to post but I thought this is important enough for the majority of readers of this blog. I would like to introduce to you the next hottest actress/model from HK, besides Elanne Kong (whom I have featured frequently already). Her name is JJ and started out as a model and has acted in her first big movie, probably the biggest HK cult movie for 2008, La Lingerie. The movie poster is included here in the post, I only know three out of the five girls in the middle, Janice Man, Stephy Tang and JJ. Anyways, have a good start to the week.

Saturday, November 15, 2008

Emerging Markets Valuations

There are many ways to value a market. The usual suspects are dividend yield, price/ book value, p/ cash flow and PER. On average, for emerging markets as a group, dividend yield is 4.2, P/BV is 1.9, P/CF is 9.5 and FY1 P/E ratio is 9.5. In comparison, U.S. dividend yield is 3.14, P/BV is 1.76, P/CF is 6.93 and FY1 P/E ratio is 11.8. On balance we can see that P/BV for US stocks are still lower than emerging markets average. The other danger is that price / cash flow is more attractive in US stocks. In valuation terms, I would see P/CF as the MOST important out of the 4 indicators because its real cash. Dividend yield while good, can be dramatically lower in future periods if earnings get pummeled. Price / book value is a comfort indicator and would only come into play in a liquidation potential or buyout potential, for on going market valuation, its not that important.

Just from the indicators alone, those critics who say that the emerging markets have fallen as hard as the US markets is wrong. Emerging markets may have some way to go to match US stocks' levels. That is not to say that emerging markets will head towards US valuations. But if the markets are at a premium, it may not recover as fast. For both emerging markets and U.S. markets, this level of fundamental valuation has not been seen in decades. You can also check my last post about stock markets valuation two months ago, just before global sell-off had been triggered. Green indicates attractive valuations, red denotes a sell.

Div.Y. P/BV P/CF P/E

Argentina 1.8 / 1.2 / 4.3 / 5.5
Brazil 2.2 / 1.6 / 4.6 / 6.7
Chile 3.5 / 1.9 / 6.5 / 12.2
China 3.3 / 1.4 / 5.8 / 8.2 ( looking OK on all counts, may be ready to rally)
Colombia 2.3 / 1.1 / 8.6 / 12.8
Czech Rep 6.2 / 2.1 / 6.7 / 8.8
Egypt 5.5 / 1.7 / 5.1 / 6.8
India 1.9 / 2.1 / 8.0 / 10.0 (may still have more room to fall)
Indonesia 5.3 / 1.6 / 5.4 / 7.2 ( its cheap, if the rupiah can get out of its rut, its a very good bet)
Israel 4.0 / 1.6 / 7.2 / 10.1
Jordan 1.7 / 1.8 / 6.1 / 15.2
Malaysia 5.6 / 1.3 / 5.9 / 9.6 (very decent on all counts, any further falls should attract sophisticated buyers)
Mexico 2.1 / 2.0 / 4.9 / 9.5
Morocco 2.8 / 3.8 / 20.8 / 20.5 (should have a lot of room to fall)
Nigeria 4.3 / 3.1 / 4.1 / 9.3
Pakistan 6.4 / 1.7 / 5.5 / 7.3
Peru 6.7 / 2.1 / 7.1 / 7.7
Philippines 4.3 / 1.3 / 5.1 / 9.9
Poland 5.4 / 1.3 / 5.5 / 7.5
Russia 2.7 / 5.8 / 81.7 / 3.5 (this market can totally collapse further)
Slovenia 2.2 / 1.5 / 11.5 / 12.8
South Africa 4.7 / 1.8 / 6.4 / 8.1
Taiwan 7.7 / 1.1 / 3.9 / 9.6 (very cheap, probably the best Asian market to go long)
Thailand 7.7 / 1.0 / 3.8 / 5.5 (even better than Malaysia)
Turkey 5.1 / 1.1 / 3.8 / 5.6 (had fallen enough, now to get the currency healthy again)

p/s photos: Tangmo Pattarathida

Countries Stock market's Capitalisation As A % Of GDP

 Why is the figure important ... if you can strip out foreign listings and non related listings (inclusive of SPACs) and maybe some REITs th...