http://economictimes.indiatimes.com/News/International_Business/USD_25-bn_bonus_for_Lehmans_NY_staff_irks_left-outs_Report/articleshow/3514319.cms
LONDON: A bonus of USD 2.5-billion, promised to bankrupt investment bank Lehman Brothers' New York staff by UK major Barclays Capital, has fuelled resentment among its employees in the European and middle-eastern operations, a media report says. Barclays Capital, which acquired the North American businesses of Lehman Brothers last week, had pledged a USD 2.5-billion bonanza for its 10,000 employees in the New York office.
I do not object to these bonus provided the government is not buying any junk assets from Barclays. It is height of hypocrisy for Wall Street to ask for a bailout and have the government to purchase these overvalued assets from Wall Street firms while they continue with their wild ways.
Tuesday, September 23, 2008
Saturday, September 20, 2008
Thought about last week’s events
The events of last week have increased the probability of hyper-inflation or a depression. Both scenarios can still be avoided. It will require deft handling by financial authorities in USA and the rest of the world.
Causes of the current crisis
Some of them are known to everyone. Some of them might not be obvious.
New Deal era regulatory structures – they regulate Fannie Mae and Freddie Mac. But they was no oversight of Bear Stearns and Lehman Brothers – big players in fixed income markets.
Richard Nixon for eliminating the gold standard
Reagan's supply side economics – ran huge debts and made it seem like it does not matter. The public remembers his optimistic side.
Alan Greenspan’s coddling of the stock market – he eased liquidity whenever the stock market was in trouble. He created the tech market bubble. He kept interest rates too low too long after 2001.
George W. Bush – one of the most intellectually challenged Presidents. I am not sure if he got lucky appointing Paulson.
Fannie Mae and Freddie Mac – cooking the books, using their muscle to intimidate Congress
Congress – a bunch of crooks interested in their own welfare
Ratings agencies – they never bothered to examine the mortgage backed securities
Wall Street – Lehman Brothers, Citicorp, Bear Stearns, Goldman Sach and countless others. They were happy making money off these MBS. I do not think the punishment is hard enough for these guys.
Home buyers - lied about their income and creditworthiness. They lacked the financial savvy to avoid buying overvalued homes or avoiding exotic loans.
Mortgage brokers – they made ALT-A, Liar and sub-prime loans happen
Government actions last week
This is a short summary of what the US government did last week
The government started out allowing Lehman to fail. They had to intervene in AIG’s case. It was an $85 billion loan.
They introduced rules banning short selling of 800 financial companies.
List of companies that cannot be shorted
http://sec.gov/rules/other/2008/34-58592.pdf
They announced plans to insure money markets. This should prevent run on money market accounts which have $3.5 trillion in cash.
They announced plans for an entity that would purchase troubled mortgages.
What do you do?
What do you do in case of hyper-inflation? Cash will be wiped out in hyper-inflation. Own a garden where you can grow some fresh produce. I believe grains like rice and wheat would be relatively cheap at least in United States unless we were forced to export it to pay off our massive foreign debt. Get a gun and plenty of ammunition to protect yourself. Get precious metals and see if you can find foreign currencies linked to gold.
What do you do in case of a depression?
Ask yourself what types of business would do well in a depression. What do people have to buy? Ask yourself how people will react in a depression. There are going to be a lot of unhappy people if we enter a depression. Anything that relives the unhappiness is going to be welcome. Consumer staples, liquor, tobacco, gambling would do relatively well. Any stocks you own now will drop in value.
What do policy makers do?
In the short run they should try to prevent bank depositors and money market holders from losing money. They should try to ease up credit for credit worthy companies and individuals.
The policy makers should make the point of moral hazard – inflicting the maximum punishment on bad actors. It has to be balanced with the delicate task of restoring economic growth.
In the long run the big question for the policy makers is that free markets are not as efficient as we would like them to be. The question is how much regulation is needed for the fair, efficient and transparent operation of our markets.
Historical parallels
In the case of 1930 depression the government drained liquidity from the economy. In the current crisis the government’s response has been to inject massive amounts of liquidity. One of the plausible scenarios is a long period of contraction like what Japan experienced in the 1990’s. I think while the government may prevent a catastrophic crash they might prolong the pain over an extended period of time.
Cost of the bailouts
It is not clear how much this bailout will cost. That is the honest answer you will get this week. No one can place a bottom on the housing prices. No one can predict how many underwater homeowners will walk away from their properties and loans.
A lot of these mortgage backed securities are held by international entities. The failure of American mortgage backed securities will make foreign buyers be selective in what they buy. The worst case scenario is that foreigners ask for a risk premium for all things American.
Review of Dodge and Cox Stock Fund
Dodge and Cox stock fund has a stellar record of 12.5% over the past 20 years. I have admired their record since their inception in 1965. The return for the last year has been disappointing 21.4%. Their bad performance last year has been a little bit of surprise.
They have $52.5 billions in net assets. I believe they have re-opened their flagship stock fund to new investors.
Given their disappointing returns I looked through their stock holdings.
Their top ten holdings as of Jun 30th 2008 are
1. Comcast
2. Hewlett Packard
3. Wachovia
4. Novartis
5. Time Warner
6. Wal-Mart
7. Sony
8. Sanofi- Aventis
9. Glaxo Smith Kline
10. News Corp.
In the top ten Wachovia seemed like a red flag. I listened to the CEO on CNBC. He said that Wachovia has posted its entire real estate portfolio online classified by zip code so that investors can draw their own conclusions. If true it is refreshing given the opacity and duplicity practiced by financial companies on Wall Street.
I believe the following companies are bad picks
American International Group
I never liked them even before this week’s event. In hindsight it looks like a bad pick.
Citigroup
It is a great franchise. But they might have too much exposure to real estate mess.
DISH Network Corp
Dish faces competition from DirecTV and cable companies. The number of cable subscribers is not going to increase faster than the population. Add to the mix -- the telecommunication companies Verizon and AT&T are introducing paid television service. The US consumer is weak. Look for small number of customers to cancel their Dish satellite TV service and switch to broadcast television. The chances of an AT&T acquisition is slim because AT&T has been rolling out their IPTV service U-Verse.
Ford Motor Co.
General Motors Corp.
The poor balance sheet of the American consumer, high gasoline prices and liabilities to retired workers make General Motors and Ford Motor horrible long term bets. However these stocks would be a gamble on Washington’s willingness to provide a bailout to the auto industry. This seems more likely after the bailout of Bear Stearns and AIG.
Motorola
Motorola is poorly positioned in terms of products. They face competition from Cisco in selling equipment and set top boxes to the cable television companies. Their cellphone division will face fierce competition from tradition players like Nokia, Samsung, Sony-Ericsson and the new players – Google Android and Apple iPhone. Their wireless infrastructure division will face a slow death. They do not have the product depth to compete with Cisco in core networking area.
I would prefer that they owned Cisco or Nokia.
Sprint Nextel Corp.
Sprint Nextel is an also ran compared to AT&T and Verizon Wireless. The only hope for Sprint stock appreciation is an acquisition by cable companies or Google. I think the number of cellphone subscribers in United States has saturated.
AT&T Wireless - 72 million
Verizon Wireless - 68 million
Sprint- 51 million
T-Mobile - 28 million
Alltel - 13 million.
add the numbers and you get 232 million
Compare it to 300 million population of United States. Let us exclude kids below the age of 10 and old people who are never going to switch to cellular.
More information can be found about Dodge and Cox stock funds at their website. Please read the prospectus before investing in any mutual fund.
They have $52.5 billions in net assets. I believe they have re-opened their flagship stock fund to new investors.
Given their disappointing returns I looked through their stock holdings.
Their top ten holdings as of Jun 30th 2008 are
1. Comcast
2. Hewlett Packard
3. Wachovia
4. Novartis
5. Time Warner
6. Wal-Mart
7. Sony
8. Sanofi- Aventis
9. Glaxo Smith Kline
10. News Corp.
In the top ten Wachovia seemed like a red flag. I listened to the CEO on CNBC. He said that Wachovia has posted its entire real estate portfolio online classified by zip code so that investors can draw their own conclusions. If true it is refreshing given the opacity and duplicity practiced by financial companies on Wall Street.
I believe the following companies are bad picks
American International Group
I never liked them even before this week’s event. In hindsight it looks like a bad pick.
Citigroup
It is a great franchise. But they might have too much exposure to real estate mess.
DISH Network Corp
Dish faces competition from DirecTV and cable companies. The number of cable subscribers is not going to increase faster than the population. Add to the mix -- the telecommunication companies Verizon and AT&T are introducing paid television service. The US consumer is weak. Look for small number of customers to cancel their Dish satellite TV service and switch to broadcast television. The chances of an AT&T acquisition is slim because AT&T has been rolling out their IPTV service U-Verse.
Ford Motor Co.
General Motors Corp.
The poor balance sheet of the American consumer, high gasoline prices and liabilities to retired workers make General Motors and Ford Motor horrible long term bets. However these stocks would be a gamble on Washington’s willingness to provide a bailout to the auto industry. This seems more likely after the bailout of Bear Stearns and AIG.
Motorola
Motorola is poorly positioned in terms of products. They face competition from Cisco in selling equipment and set top boxes to the cable television companies. Their cellphone division will face fierce competition from tradition players like Nokia, Samsung, Sony-Ericsson and the new players – Google Android and Apple iPhone. Their wireless infrastructure division will face a slow death. They do not have the product depth to compete with Cisco in core networking area.
I would prefer that they owned Cisco or Nokia.
Sprint Nextel Corp.
Sprint Nextel is an also ran compared to AT&T and Verizon Wireless. The only hope for Sprint stock appreciation is an acquisition by cable companies or Google. I think the number of cellphone subscribers in United States has saturated.
AT&T Wireless - 72 million
Verizon Wireless - 68 million
Sprint- 51 million
T-Mobile - 28 million
Alltel - 13 million.
add the numbers and you get 232 million
Compare it to 300 million population of United States. Let us exclude kids below the age of 10 and old people who are never going to switch to cellular.
More information can be found about Dodge and Cox stock funds at their website. Please read the prospectus before investing in any mutual fund.
Tuesday, September 16, 2008
Book Review - Pop ! Why Bubbles are great for the economy? by Daniel Gross
The author tries to make a case in this book that bubbles are not entirely bad. The author makes a case that overinvestment in certain sectors during bubbles sets the stage for subsequent innovations in the economy. Let us make no mistake – a lot of investors lose their money when the bubble ends. It is good reading for those who want to profit after the bursting of a bubble.
The author looks at the bubbles in America spanning three different centuries. First he starts with the telegraph and railroad bubbles of the 19th century. Then he moves to the stock market bubble of the 1920s and the internet/telecommunications bubble of the 1990s. Finally he looks at the real estate and alternative energy bubbles of the 21st century. He examines the causes of each bubble, identifies the main events during the bubble and looks at the aftermath of each bubble. You get the feeling that the economic history of America is one of bubbles.
The most interesting fact about the railroad bubble is the involvement of the federal and state governments. They encourage private companies to overbuild their rail networks. The railroad companies behave in a manner similar to their counterparts in the dot com era. They cook the books like Worldcom and Enron. They spend money on projects that made little economic sense. The real economic impact of the Railroads was felt after the investment bubble in railroads ended. They lead to establishment of large retailers – Montgomery Ward and Sears. It made to easy for them to transfer physical goods in a cheap efficient manner.
The author chronicles the price wars in the telegraph business that drives down prices and increases the demand for telegraph services. The telegraph system leads to innovations - money transfer and transfer of business information. Companies that used horse drawn couriers to send messages start using the telegraph to transmit business information. Western Union and Associated Press are two companies that owe their beginnings to the establishment of the telegraph system.
The telecommunications bubble traces its beginnings of the breakup of AT&T in 1984 and the Telecommunications Act of 1996. The telecommunication bubble led to installation of high speed fiber optic networks and fast broadband connections for the last mile. This cheap bandwidth is being exploited by the likes of You Tube. Of course it helps that America has an installed base of 150 million internet users and Google has smart engineers who design applications to make use of the bandwidth.
The contemporary bubble that most of us would be interested in is the real estate bubble. The author contends that the real estate bubble has improved the housing stock in the United States of America. It could lead to the development of financial instruments that can be used to hedge against the value of homes. My personal view is that price wars in housing do no good to existing homeowners who are counting on high home prices for home equity loans, retirement etc. It does not benefit financial institutions that have to mark down the values of the assets behind the mortgage backed securities. It will be interesting to see how the real estate bubble ends.
The book is organized into chapters – each chapter dealing with a different bubble. So you can skip chapters and read the book anyway you desire. In all this book makes for easy and interesting reading.
The book is available at Amazon
http://www.amazon.com/gp/product/0061151548?ie=UTF8&tag=journefrommid-20&link_code=as3&camp=211189&creative=373489&creativeASIN=0061151548
The author looks at the bubbles in America spanning three different centuries. First he starts with the telegraph and railroad bubbles of the 19th century. Then he moves to the stock market bubble of the 1920s and the internet/telecommunications bubble of the 1990s. Finally he looks at the real estate and alternative energy bubbles of the 21st century. He examines the causes of each bubble, identifies the main events during the bubble and looks at the aftermath of each bubble. You get the feeling that the economic history of America is one of bubbles.
The most interesting fact about the railroad bubble is the involvement of the federal and state governments. They encourage private companies to overbuild their rail networks. The railroad companies behave in a manner similar to their counterparts in the dot com era. They cook the books like Worldcom and Enron. They spend money on projects that made little economic sense. The real economic impact of the Railroads was felt after the investment bubble in railroads ended. They lead to establishment of large retailers – Montgomery Ward and Sears. It made to easy for them to transfer physical goods in a cheap efficient manner.
The author chronicles the price wars in the telegraph business that drives down prices and increases the demand for telegraph services. The telegraph system leads to innovations - money transfer and transfer of business information. Companies that used horse drawn couriers to send messages start using the telegraph to transmit business information. Western Union and Associated Press are two companies that owe their beginnings to the establishment of the telegraph system.
The telecommunications bubble traces its beginnings of the breakup of AT&T in 1984 and the Telecommunications Act of 1996. The telecommunication bubble led to installation of high speed fiber optic networks and fast broadband connections for the last mile. This cheap bandwidth is being exploited by the likes of You Tube. Of course it helps that America has an installed base of 150 million internet users and Google has smart engineers who design applications to make use of the bandwidth.
The contemporary bubble that most of us would be interested in is the real estate bubble. The author contends that the real estate bubble has improved the housing stock in the United States of America. It could lead to the development of financial instruments that can be used to hedge against the value of homes. My personal view is that price wars in housing do no good to existing homeowners who are counting on high home prices for home equity loans, retirement etc. It does not benefit financial institutions that have to mark down the values of the assets behind the mortgage backed securities. It will be interesting to see how the real estate bubble ends.
The book is organized into chapters – each chapter dealing with a different bubble. So you can skip chapters and read the book anyway you desire. In all this book makes for easy and interesting reading.
The book is available at Amazon
http://www.amazon.com/gp/product/0061151548?ie=UTF8&tag=journefrommid-20&link_code=as3&camp=211189&creative=373489&creativeASIN=0061151548
Sunday, September 14, 2008
The Start
I am interested in personal finance and investing. I am an engineer by education. The reason for this blog is simple. I have acquired a lot of financial knowledge in the past few years. I like to share the information with rest of you. I am not the smartest or the richest kid on the block. On the other hand I have never been dumb or poor in the financial sense. I think that others can relate to my experiences and enjoy my readings.
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