Monday, January 11, 2016

Bowie - Not Of This World, Has Left Earth

I am glad I did a tribute to David Bowie back last September. His demise was sudden as his fight with cancer was kept well hidden from the media. Sad.

The Big Short ***** (5 Stars)

Just saw the movie. If you are in the investment industry for the past 10-30 years, it's flicking brilliant. As good as the book by my fav writer. Which is why I only have time to read nonfiction... If you are not, this might be a hit n miss. Danger being lost with the terminologies but they have tried very hard to explain everything. 

The director did a smart thing by getting a few "guests" as themselves explaining various investing concepts and terminologies to movie goers - that was a hoot. Especially with Margo Robbie in bath explaining investing terminologies ... then we had Anthony Bourdain and even Selena Gomez.

The Big Short will be a frontrunner for Oscars ... the overwhelming stupidity, criminality, conspiracy and institutionalised depravity of the financial system will ensure that this movie will At Least get nominated as Best Picture this year. The Academy likes to give out honours to very old people or to make a statement ...The Big Short falls under the latter category. The voting members are filled with liberal minded, mainly Democrats or socialistic leaning members.

Even I am very mad with the debacle, we can see the carnage, the devastation ... and we have more than sufficient information on who the culprits were ... and at the end of the day, ONE person goes to jail.

I will take the odds n bet that it stands a great chance. Btw Christian Bale and Steve Carrell were awesome, but Bale has his nose in front for Best Actor. ***** 5 stars.

In many ways The Big Short being a reality tale, is but a reflection or copy of the same shit in politics. The great thing about financial crisis is that we get a lot more transparency and a lot more information from reams of data and opinions from experts. Something we do not always get from the dastard "industry" that is politics. A place where almost everyone has an agenda that is selfish and egotistical, and lies and empty promises or silly sales speeches dominate the vernacular. Whenever shit hits the fan, there will be the blame game, everyone on a first out best dressed ... the mocking of the truth and what is truth... the belittling of goodness of the human spirit.

I think we need to study the book, the movie a lot more because we can learn more on how to behave better as human, and a lot better as investors. There is always repercussions to gains and losses, its not just the money, investing in assets or losing always has a real effect on lives, whether you are winning or losing. So, if you are on the right side, you may not be totally "right". Making money is good, we cannot distill all the repercussions or collateral damage on the losing side ... which is why we should do our best to give back, to balance the scales of justice where we can.

Before you go to watch the movie, you may like to re-read a blog posting (cum printed article) back in June 2008 - it was my take on who should be blamed for the subprime crisis. Pretty accurate methinks.

Back in JUNE 2008, I wrote an assessment of the blame game for the sub prime crisis. It was also published in StarBiz when I had my weekly column Investing Scents. Looking back, it was a very good assessment and I still stick by it. In fact, Michael Lewis' book just confirms most of what I opined back then.

The Bald, The Beard & The Ugly

I was watching the uncomfortable grilling by the US lawmakers on Bernanke and Paulson. I pity those two guys. They are trying to fix a problem which was inherited but had to suffer the embarrassment of trying to persuade them to approve the funds. We all must be wondering who actually are the culprits that brought about such a calamity. I shall try to ascribe blame to the relevant parties. Its a highly subjective exercise, and everyone will have a different opinion, but that's ok. Here's my two cents worth (and rapidly diminishing two cents in value): 

 Management of Investment Banks & Mortgage Lenders - They were greedy. They had thrown risk management out the window. They were overpaid for the work they do. When the going is good, they all pocket more than their share of the chips on the table. The worst punishment they got was to walk out the door with nary an apology. The vast amount of liquidity in the system and the thirst for mortgages prompted them to "invent" new fangled instruments to package these loans and resell them, with little regard to the leverage effect. Lenders kept pushing adjustable-rate and subprime mortgages, while investment banks bundled millions of risky loans and reselling them to investors. It was when these investment banks started to buy these same instruments themselves that really decimated their capital.

 Alan Greenspan - He will continue to deny it was his doing, but since 2001 he advocated a lowering of interest rates and continued a strong money supply growth policy. That prompted the public to buy properties and even speculate in them. Greenspan was well known for lowering rates aggressively to counter any crisis – the query was that by doing that markets were never allowed to adequately correct the imbalances. This led to the credit explosion. Alan did see deterioration in the credit market back in 2003 and 2004 or was he blind, but didn't warn lenders off using the "non traditional mortgages" now seen as precursors of what is now a credit crisis until December of 2005, shortly before Greenspan resigned. The excessive liquidity in the system was not just by the Fed, in fact major central banks were guilty of pumping vast amount of money supply into the system. Back in 2004 Greenspan opposed tougher regulation of financial derivatives, and actually praised adjustable-rate mortgages and refinancing for homeowners. 

 Ratings Agencies (S&P, Moody's, Fitch) - They are the unwitting culprits, and I am being nice here. They rated loans and bonds based on these mortgages AAA status, which caused many buyers to believe in their assurance that they were buying solid AAA papers. The ratings agencies again were too late to downgrade these papers, long after the damage is done. Its their stupid ratings and analysis which gave fuel to these instrument to be hawked to unsuspecting investors. Its their stupid ratings and analysis that gave the investment banks the bravery to keep piling up these instruments to the market. What kind of value added analysis are the issuers paying these rating agencies for?  Its obvious that the analysts knew much of the packaged loans consisted of subprime. Were the fees too enticing? Were the ratings agencies trying to curry favor with the banks? Maybe the analysts and managers were interested in going to work for the banks, where they can earn a lot more money. If these ratings agencies cannot do their jobs without fear or favour, how are investors to rely on these ratings anymore? Maybe the US should empower the government to rate bonds, especially if the government requires certain kinds of fund managers to own only officially-rated bonds.

 The Regulators – The financial markets and the various instruments have their respective regulatory units. You may include the Fed, the CFTC, the SEC, FDIC, even the FASB into the fold. They are supposed to regulate and oversee the markets and the financial instruments. Where was the voice of reason? The last six years' housing and subprime mortgage bubble and bust had little to do with excessive government intervention. Instead they had all to do with the lack of any basic sensible government regulation of the mortgage market, regulation in practice rather than in theory. They should have instituted new guidelines and rules to govern these CDOs, credit default swaps, and the leverage aspect of financial firms and their capital at risk. Even till now, they are mainly silent. 

 Paulson & Bernanke - They could have tried to reverse the damage in their early days as Treasury head and Fed chairman respectively, but they basically inherited a huge problem.

Now they talk about having to properly regulate derivatives and new instruments properly - sigh, there were institutions and people already appointed to do those jobs, its just that they did not do their jobs properly. I am still waiting for some of the above to be prosecuted for what they did and didn't do. At the end of it all, it appears that what some of them didn't do would be more punishable.

What about the American borrowers, the homeowners themselves should shoulder some of the blame, right? I left them out of the above equation for a few reasons: 

a) I do think there should be an element of "personal responsibility" for your actions, but it seems to me that they are already paying the cost for their foibles. Many had their homes foreclosed already. They have lost their deposits and the payments made towards these loans. It seems to me, they are THE ONLY group that has actually "really lost" materially and is already being punished for that. It is very hard not to be drawn into easy money, uptrending markets without need for deposits or proof of employment ... just join the party and the fees are shared gleefully all the way down.

b) The bailouts do not really bailout the end borrowers, they extend the life of the companies. Maybe the bailouts will allow the companies more time to foreclose these properties in an orderly manner. Very few of those will be able to renegotiate their existing loans on decent terms to allow them to continue to fund their mortgages. Most of the loans are priced at a time when property values are at least 30%-40% higher than now - better to declare bankruptcy than to continue to reconfigure the loan, isn't it?

c) The public are not equipped to regulate themselves. That is why there are agencies created with "capable people" to regulate and monitor the markets. You cannot expect the majority of borrowers to understand in detail CDOs, credit default swaps, or whether the brokers are leveraging themselves to the hilt. You can only have assurance in relying on top ratings agencies branding certain papers as AAA. Which person is able to go and read the 500 page report and examine for themselves that these AAA bonds consist of thousands of small mortgages spread out over the country, how to value the price trends and affordability ratios of these borrowers?

d) The public will often act in herd like mentality. They are driven by greed just like most people. They see people making 50% in 2 years from speculating in properties, they want to be part of it. They try to apply for loans, and were probably even more shocked that these mortgage lenders were more than willing to lend to them. The markets are often characterised by bouts of insanity, if you stir them up with enough incentives and carrots, people will act irresponsibly. The regulating agencies are there to ensure for an orderly market and to quell excesses. The people cannot do it themselves. 

The ones who got out early will think they are very smart. The ones who got hit will think they were unfortunate victims. Both are wrong in their perception of their actions, financial decision making and brainpower. Both groups are closer to each other in every aspect than they would like to think. Its financial musical chairs, winners and losers depend on when the music stops, not whether you were smart.

In case you haven't figured the headline out: The Bald, The Beard & The Ugly – Paulson, Bernanke & Greenspan.

Friday, January 08, 2016

Star Wars vs Pahang

credit Yusri Amir

What Is Wrong With China (Markets)

What caused the calamity:

a) the Chinese stock exchanges have grown terribly big over the past 7-10 years

b) the regulatory side had been lacking in many areas - no strict imposition of margin lending; wishy washy rules on shorting, so much so that some foreign funds have been able to short the China shares pretty easily(thanks also to Citic Securities); the silly rule that allows companies to suspend themselves indefinitely for no reason, etc...

c) the impostion of circuit breakers is good, just like they had in American exchanges, but again when the regulatory side fails to understand the essence of their own markets, the circuit breakers only encourage more selling to queue up .. why is that, the regulatory body did not realise that the largest participants in their markets are private/retail and not institutional or foreign ... what I am trying to get at is the markets there may be BIG but they are NOT DEEP ENOUGH ... depth is measured by number of participants, the kind of participants, the different types of funds ... so that in any situation there are long funds willing to buy when they see deep value ... right now, when a crisis becomes panic, it mushrooms into calamity BECAUSE almost everyone thinks alike ... so circuit breakers are a no no for now until the market is deeper and more mature

d) the stupid imposition of no selling by substantial company owners ... its like the T+4 phenom here ... Jan 8 was the day they could sell, so guess who is selling ahead of them, if you want ti impose some sort of selling restrictions - do it gradually (e.g. can sell only 5% of their total shares every 3 months till further notice)

e) the lack of maturity and coordination by their central bank and the exchange regulatory body ... left hand does not know what the right hand is doing ... either they did not know or they knew and did not foresee the subsequent effects... how can you suddenly drop the currency and intervene to make it weaker in a substantive manner, didn't you realise that as the second biggest in almost everything, what you decide for monetary policies have significant effects ... obviously NO consultation was made to ECB or Fed ... as they would have advised to do it in steps and gradual basis, and certainly not when your stock exchanges are in crisis mode...

So what now, they have remove the circuit breakers ... now the company owners can sell as well ... you are right at the lowest point of the previous scary correction a few months back ... I would change the rules for company owners to limit their selling by staggering them (as mentioned above) ... intervention is likely to be more aggressive  by Beijing and they can marshal almost unthinkable resources... following 2 days of 7% = more than 15% ... another 7% would really put it in ridiculous territory which should see some genuine buying coming in.

The currency realignment does not hit Malaysia that much as the industries and SMEs no longer compete on the same stuff as China. Yes there will be repercussions but a weaker yuan is mild compared to what the USD did to us. Buying power may be reduced from China but the weak ringgit to almost every other has already shifted our clients elsewhere.