BTW Steve, the Motorola Q sucks a**. Not that iPhone is any better. But as far as competing for business users. Dream on! What you think Blackberry wasn't invented before your Motorola Q?
Sunday, February 24, 2008
Billionaire vs. an idiot with a billion dollar
Steve Ballmer is definitely the latter.
BTW Steve, the Motorola Q sucks a**. Not that iPhone is any better. But as far as competing for business users. Dream on! What you think Blackberry wasn't invented before your Motorola Q?
BTW Steve, the Motorola Q sucks a**. Not that iPhone is any better. But as far as competing for business users. Dream on! What you think Blackberry wasn't invented before your Motorola Q?
Friday, February 22, 2008
Banks' business model is NONSENSE
As we already know, most bank stocks are suffering from this slow down in mortgage underwriting and anything related to it (RMBS, CDOs, CLOs, CMOs....good stuffs). Anyway, this got me thinking about the banks and why I would almost NEVER invest in one.
Banks generate profit by borrowing money and lending it out. So if a bank borrows at 5% and lend the money out at 7%, it would make 2% on the capital.
Lets take a simple example:
Neighborhood Bank (NB) receive financing from deposit ($50), short term and long term credit facilities ($42) and issued equity ($8 - 8% capital requirement). The bank total capital is $100 ($92 liability + $8 equity). And the average cost of capital is 5%. So every year, the bank has to pay $5 to its investors. The bank will take this $100 and lend it out to Neighborhood Business Corp. and charge 7%. The bank will receive $7 and pay out $5, netting out $2 each year. This extra profit would go to the equity holder, so the equity holder is rewarded handsomely (100% ROE). Obviously in this example, we didn't factor in administrative cost and such, if we did, the equity holder of the bank would probably make about $15-20% ROE. Not too shabby.
The bank essentially is a over leveraged corporation (92% debt 8% equity). Now imagine the bank has to pay its administration expenses and other fix costs. A typical bank probably has net interest of 1.5%, so to cover its fixed costs, they need a HUGE capital base. And if part of their assets (portfolios of loans) start to go bad- the first loss would hit the equity holder. So the equity holder is essentially investing in an over leverage corporation that allow them to invest a small amount and make what it seem to be a significant gain - because of small initial investment.
This is what is happening to the banks now. Some of the banks might even trade "under" book value. The reason is simple: the book value of the bank is simply A - L = E. The problem is the market value of the Asset can be significantly different from the book value asset- so when a bank is trading below book value- it doesn't necessarily means that its cheap.
On top of that, the banks can buy "insurance" or credit derivatives on its loan portfolios. By doing so, they can lower their capital requirement- further allowing them to leverage up over 92%. Since most banks do over leveraged, they would face capital squeeze when the market value of their assets go down the drain... which is exactly what is happening now. In a sense, the banks are always walking on a thin line with equity holders at risk. That and a huge capital base that require to run the bank- make it a very unattractive business for me to invest in. Now, if we are talking about investment banks and brokers....that's a different story....
Banks generate profit by borrowing money and lending it out. So if a bank borrows at 5% and lend the money out at 7%, it would make 2% on the capital.
Lets take a simple example:
Neighborhood Bank (NB) receive financing from deposit ($50), short term and long term credit facilities ($42) and issued equity ($8 - 8% capital requirement). The bank total capital is $100 ($92 liability + $8 equity). And the average cost of capital is 5%. So every year, the bank has to pay $5 to its investors. The bank will take this $100 and lend it out to Neighborhood Business Corp. and charge 7%. The bank will receive $7 and pay out $5, netting out $2 each year. This extra profit would go to the equity holder, so the equity holder is rewarded handsomely (100% ROE). Obviously in this example, we didn't factor in administrative cost and such, if we did, the equity holder of the bank would probably make about $15-20% ROE. Not too shabby.
The bank essentially is a over leveraged corporation (92% debt 8% equity). Now imagine the bank has to pay its administration expenses and other fix costs. A typical bank probably has net interest of 1.5%, so to cover its fixed costs, they need a HUGE capital base. And if part of their assets (portfolios of loans) start to go bad- the first loss would hit the equity holder. So the equity holder is essentially investing in an over leverage corporation that allow them to invest a small amount and make what it seem to be a significant gain - because of small initial investment.
This is what is happening to the banks now. Some of the banks might even trade "under" book value. The reason is simple: the book value of the bank is simply A - L = E. The problem is the market value of the Asset can be significantly different from the book value asset- so when a bank is trading below book value- it doesn't necessarily means that its cheap.
On top of that, the banks can buy "insurance" or credit derivatives on its loan portfolios. By doing so, they can lower their capital requirement- further allowing them to leverage up over 92%. Since most banks do over leveraged, they would face capital squeeze when the market value of their assets go down the drain... which is exactly what is happening now. In a sense, the banks are always walking on a thin line with equity holders at risk. That and a huge capital base that require to run the bank- make it a very unattractive business for me to invest in. Now, if we are talking about investment banks and brokers....that's a different story....
Long FOOD
My play for 2008 is clear. It is to long agriculture related securities. Why? Because we all have to eat, recession or not. And as emerging markets are growing, more people can afford food. The acreage of land for agriculture isn't getting any bigger neither. Hog prices in China are rocketing, corn and wheat prices in U.S. are the same.
I'll be looking to buy Agricultural ETF (symbol: DBA) for the long term (2-5 yrs).
I can't figure out anything more then a sure play as this. What's the downside here? Are we going to stop eating? Since the ETF invest in futures and agricultural derivatives, there will be no risk in related to rising in energy prices (which squeeze food producers' margins).
Long DBA for 2008!
I'll be looking to buy Agricultural ETF (symbol: DBA) for the long term (2-5 yrs).
I can't figure out anything more then a sure play as this. What's the downside here? Are we going to stop eating? Since the ETF invest in futures and agricultural derivatives, there will be no risk in related to rising in energy prices (which squeeze food producers' margins).
Long DBA for 2008!
Wednesday, February 13, 2008
Rome
How can you tell the U.S. is a falling World Power? Forget about the war, the huge budget deficit, the leader that can't really speak, or the huge household debt. Let's look at something real simple:
NYC:
http://www.youtube.com/watch?v=Lb-6bFqDSi8&eurl
This is an event called "Pillow Fight Day" where as the productive citizens and residents of the city came out to a place and smash each others with pillow. Above video is the video of NYC Pillow Fight Day in 2007- notice the amount of people showed up and feathers on the ground.
The similar event is hosted in Shanghai, China.
Shanghai:
http://www.youtube.com/watch?v=cobYJQ0iGzw
You can clearly see much less people participated in Shanghai (also a very crowded city). Also there are much less feathers on the ground- nearly none.
So this is what our country has became. Smashing each others with pillow in the middle of the day, leaving massive amount of feathers for people to pick up and go to waste. Good job, NYC!
I wish I can understand how "fun" it is, but I just don't. Save your pillow, donate it to someone that need them. All jokes aside - Pillow Fighting day is stupid.
NYC:
http://www.youtube.com/watch?v=Lb-6bFqDSi8&eurl
This is an event called "Pillow Fight Day" where as the productive citizens and residents of the city came out to a place and smash each others with pillow. Above video is the video of NYC Pillow Fight Day in 2007- notice the amount of people showed up and feathers on the ground.
The similar event is hosted in Shanghai, China.
Shanghai:
http://www.youtube.com/watch?v=cobYJQ0iGzw
You can clearly see much less people participated in Shanghai (also a very crowded city). Also there are much less feathers on the ground- nearly none.
So this is what our country has became. Smashing each others with pillow in the middle of the day, leaving massive amount of feathers for people to pick up and go to waste. Good job, NYC!
I wish I can understand how "fun" it is, but I just don't. Save your pillow, donate it to someone that need them. All jokes aside - Pillow Fighting day is stupid.
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