Friday, December 12, 2008

Markets Weakened, Is That So Terrible?

Asian investors were scrambling for reasons why Asian markets were battered today. More importantly the Dow futures were down 200-300 points. There were basically two issues: 1) The Senate rejected a $14 billion bailout plan for U.S. automakers, in effect ending congressional efforts to aid General Motors Corp. and Chrysler LLC, which may run out of cash early next year.

The Senate thwarted the bailout plan when a bid to cut off debate on the bill the House passed yesterday fell short of the required 60 votes. The vote on ending the debate was 52 in favor, 35 against. Earlier, negotiations on an alternate bailout plan failed.

GM said in a statement, “We are deeply disappointed that agreement could not be reached tonight in the Senate despite the best bipartisan efforts. We will assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis.”

Connecticut Democrat Chris Dodd, who helped lead the negotiations, said the final unresolved issue was a Republican demand that unionized autoworkers accept a reduction in wages next year, rather than later, to match those of U.S. autoworkers who work for foreign-owned companies, such as Toyota Motor Corp.

Earlier today, White House spokeswoman Dana Perino warned that an agreement was necessary for the U.S. economy. “We believe the economy is in such a weakened state right now that adding another possible loss of 1 million jobs is just something” it cannot “sustain at the moment,” Perino said.

2) Bernard Madoff had confessed to employees this week that his investment advisory business was “a giant Ponzi scheme” that cost clients $50 billion before two FBI agents showed up yesterday morning at his Manhattan apartment.

“There is no innocent explanation,” Madoff told the agents, saying he personally traded and lost money for institutional clients. He said he “paid investors with money that wasn’t there” and expected to go to jail. With that, agents arrested Madoff, according to an FBI complaint.

The 8:30 a.m. arrest capped the stunningly swift downfall of Madoff and businesses bearing his name that specialized in trading securities, making markets and advising wealthy clients. Many questions remain unanswered, including whether Madoff’s clients actually lost $50 billion. The complaint and a civil lawsuit by regulators describe a man spinning out of control.

Madoff’s firm had about $17.1 billion in assets under management as of Nov. 17, according to NASD records. At least 50 percent of its clients were hedge funds, and others included banks and wealthy individuals, according to the records. The firm was the 23rd-largest market maker on Nasdaq in October, handling an average of about 50 million shares a day, exchange data show. It handled orders from online brokers for some of the largest U.S. companies, including General Electric Co. and Citigroup Inc. Prosecutors are joining regulators at the Securities and Exchange Commission, which filed a civil lawsuit, in scrambling to unravel the collapse of Bernard L. Madoff Investment Securities LLC. The broker-dealer and investment adviser was housed in a lipstick-shaped building at 885 Third Ave.

A rapid series of events in early December preceded the firm’s demise, according to the arrest complaint and SEC lawsuit.

Of course the auto bailout issue would dwarf the second issue. The second issue was more a Ponzi, pyramid scheme, which should actually involve little actual shares or derivatives. I am of the opinion that the auto bailout should not happen. Hence to me, the rejection is good. However, it is likely that Obama cannot NOT save the auto industry. The rejection would be very helpful in extracting more concessions from the unions and companies - very likely at least two of the will be forced to merge.

Overall, this is on track to be a much more reasonable bailout with strong performance conditions. There could very well be one major CEO for two, maybe three auto companies, which may make consolidation easier. It will also strip out much of the domestic competition.

The USD dropped heftily on the news, sending the yen to weird levels. Below 90 yen, there is very little room for Japanese exporters to even make money. The easing in USD is very good. It shows a willingness to move out of the stupid currency. Just like the immense bubble forming in US Treasuries, it will need to deflate soon.

The ridiculous risk aversion have prompted many to hold Treasuries, but there is no such thing as really safe if people act irrationally. The rush to Treasuries is very irrational, its a bubble. How will such a bubble crack?

First the USD moves weaker as smart money starts to put money to work in foreign assets.

Secondly, the bond yield on corporate side gets lowered as more investors regain their senses that maybe not so many corporates will fail. Right now the bond yield imply that some 20% of all company that have issued bonds will fail.

The funny thing is that buyers of Treasuries will not LOSE much money when the bubble deflates, their LOSS is in the forgone better yields in corporate bonds and other returns from other assets had they deployed them in other ways.

p/s photos: Karena Lam Kar Yan


James Bull said...

Actually USD is appreciating against all major currencies except JPY.

Both USD & JPY are strong after the bailout failure news, just JPY is much stronger.

solomon said...

Over in the kopitiam, I heard old forks saying "Ulta (Bad)" for Auto bailout and "Mad dog" for Madoff.

For Auto bailout, I favour a job saving approach but the car produced must be fuel-efficient and environment friendly. Failed exec must go.

For Madoff, it depicts this is a societies where respects are paid and got backslashed for. He can go for jail, how many years?? Money lost already///No good example for next generation.

Well, the markets still showing resilient amidst all the econ figures and scandal. If mkt is the leading indicator, it may suggest that it is waiting for explosive bear rally. Well, still agreed that we should not be agressive but chances of Santa small rally are higher now.

Signs of small fund inflows are here....well better than outflows ya.

I am going for the russian novel.

Tony said...

This has been on my mind a long time. Perhaps Dali can share his thoughts. PNB has been paying 6 to 7% returns year in year out on theirs funds even on horrible times like now. How is this possible unless it is a Ponzi scheme like Madoff's? Redemptions on PNB's funds are usually insignificant and subscriptions are snapped up in no time.

ONI said...


Pozi schemes works as long as contributors keep increasing and redemption is low. Advertisement of better than normal return will take care of drawing-in more contributors. :)

ASB used to give out % return in teens in earlier days. Not sure abt now.

Ivan said...

So, the fail bailout will make DJIA fall even more?

or window dressing and CNY will make local market cheer?


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