A Pat On the Back?

http://credoip.blogspot.com/2007/11/i-am-not-bottom-fishing-on-financials.html

I said I was skeptical then, do you believe me now?

LOL, granted I'm only 1 out of millions out there who believed this sh** wasn't over.

http://biz.yahoo.com/ap/080316/jpmorgan_bear_stearns.html

JP Morgan pulled the biggest bank robbery in the century. Kudos to Jamie Dimon. Because of his and the company's conservative strategy, which now helped to bank to reserve enough capital for strategic acquisition. JPM is in fact, being run like a distressed hedge fund, except it has many other less risky businesses. The Bear Sterns acquisition and TGT credit business will bring JPM a good chunk of profit in the future. Jamie Dimon, in my book, is the best trader of 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?

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....

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!

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.

Wall St. Tech darlings

"Opps, I paid too much for growth"

The R word

Aren't we already in a recession? I mean if you take nominal GDP - CPI = real GDP. Which at this point is close to 0%- the economy already "recessing" from the more normal 3-4% long term GDP growth. Strong employment was the only thing that held up in this economy and that picture is looking bleak, figuratively and literally.

However, the international industrial companies are doing quite well. Honeywell, 3M, GE, United Technologies, Textron are all doing quite well. The weak dollar definitely help the exports and international business. Could it really be that the rest of the world are "decoupling" from the U.S.?

China has built quite a huge foreign reserve in the last couple years- now all of those reserve are being deployed in finding energy resources (look how aggressive the Chinese oil companies are in acquiring foreign oil companies- Sinopec/CNOOC) and infrastructure building- these are capital investment that flow back to the economy. Can it be that China and other developing economies can hold up (because of infrastructure investment) while U.S. is slacking?

Bush's Stimulus and the Super Bowl

I'm going over 2 seemingly unrelated topics in this post but in the end I will discuss how they will be similar.

Bush's Stimulus

Disasterous plan that is only delaying the inevitable. Somehow this plan will save America from recession (if it already isn't in one) along with curing AIDS and finding alien lifeform in outer space. Let's get down to it ... all this plan does is to stick more debt onto the future. By issuing bonds to pay off the $150 billion stimulus package (could be more once the Democrats throw in all the additional programs to increase food stamps and bigger Medicaid budgets), you are really paying for immediate gratification and temporary salvation and getting in return a big blurry future. Of course America knows this really well as our nation is one of the poorest in terms of savings and having millions of consumers close to max on lines of credit. Way to go on that plan Bush / Paulson. And they even have the nerves to propose a bill to add personal finance classes will now be offered in a government program for the poor. Yeah, start those classes with a lesson on fiscal restraints won't you. It's going to be my generation and future generations that will shoulder all of this heavy debt. It's no wonder the young nowadays are averaging only 2-3 years on the job as we all know there is little job security left and what's left of Social Security will only go towards the baby boomers. Generation Y should be re-dubbed Generation Debt.

Another item that has been tugging at me is this notion of a recession. Why is that "r" word so heinous? All the meaning of a recession is 2 straight quarters of a decrease in the GDP. 2 quarters ......... only 6 freaking months !!!!!!!!!!! Where exactly is the shame in that? Everyone needs a bit of a down time to calm their nerves. One cannot fully appreciate the good unless there is bad. It's like wishing for sunny skies everyday and then seeing all the plants die due to lack of rain. This is exactly how fickle this country has become due to the "r" word. Now if it's the "d" word as in DEPRESSION, then I would be scared. Before then, don't tell me 6 months of downtime is bad. That is how bubbles are corrected and believe me, there is still a real estate bubble especially in NYC and LA.

And speaking of real estate, if the proposed bill to up the limits that Freddie Mac and Fannie Mae may accept on loans with limits to vary depending on the U.S. city, it would cripple a rational economy. All this bill would do is to tell the world that U.S. real estate speculation is okay and that speculators can continue to drive up the prices on housing. Yeah, that's right, let the regular Joe rent while I speculate and try to make a bundle knowing that I have a floor to fall back on. This is total BS. By allowing say the NYC market to have limits of $716K, which is more than 3x the national average, is to allow for a continued real estate bubble. At the end of the day, if Congress really wants the American dream to come true, then leave the limits as they stand and perhaps expand on housing mortgage programs like NY State's SONYMA. Why should there be such a high cap on housing which all but ensures that everyday consumers be priced out of a house they can call their own?

Alright, enough of this economic ranting, it's already making me depress. Now for some fun sport analytical stuf:


Super Bowl

There are going to be several things to look out for this Sunday's Super Bowl matchup between the Giants and the Patriots. Key among such matchup would be the line battle, namely the awesome offensive line of the Patriots, the real success to the Pats, against the amazing defensive front 7 for the Giants. The O-Line of the Pats really deserve the MVP this season and not Brady because any QB can throw behind a line that allows them like 2-3 minutes to throw. Watch any Patriots game and one would notice that Brady just stands in the pocket, calmly waiting for Moss to get deep before throwing the deep ball (or if he's well covered like the SD game, then chuck to Donte Stallworth/Jabar Gaffney. Trust me, any QB would do well standing behind the Pats O-Line. As for the Giants, who lead the NFL in sacks, there has rarely been a team so fearsome in their defensive front 7 where there are 4-5 legitimate pass rushers. It's going to be an amazing battle in the trenches and one that I'm going to be looking at deeply.

As for the keys to each of the team's success they are:

Patriots

If the O-Line can keep the rushers from touching Brady for at least 45 seconds, then the Giants are done. Their secondary is very suspect and trust me that Wes Welker/Stallworth (Moss will be covered well) will shred them. Also look for the Patriots to pound the ball early and then throw late in the game as the Giants will get frustrated with stopping Maroney. In the beginning of the season, Belicheat abandoned the run in favor of the pass to go against conventional wisdom (it worked!) and once everyone buys into the Pats being such a pass happy team, he immediately switches gears and turns Maroney loose. It also helps that Maroney is now free of injuries that was bugging him in the 1st half of the season. It was then no surprise that Maroney has been averaging well over 100 yds in the post season. Giants, be wary!

Defensively the Pats will try to blitz all day as they know they can befuddle and faze Eli with movement. The key reason why they were able to come back from 12 pts down in the last game of the season against the Giants was the fact that Belicheat finally decided to rush and not allow Eli all the time in the world. Once this occurs, Eli became the old Eli, which is just a younger version of Jeff George, and the Pats will have their undefeated season.

Giants

Blitz, blitz, and more blitz. The G-Men must unsettle Brady and not allow him to sit in the pockets all day. Stick Pierce on Welker, double team Moss, watch out for the run and the Giants may manage to survive.

Eli must be the Eli that he was in the playoff run thus far and not make any mistakes. THE GIANTS MUST TAKE RISK meaning no punting once they are in Patriot territory. There is no need to make conservatively. If they are in the Pats' 40 yd line and facing a 4th and long, GO FOR IT. Throw to Toomer who has been on a resurgence this season and is the most reliable Giants receiver. Against the biggest offensive force ever in NFL history, now is not the time to play timid. This is the final game in the biggest stage so be bold, be very very bold.

Of course this is all a big test to the G-Men which is why they are currently 12 pt underdogs. And expecting a conservative Coughlin to take risk in the big game is also going to be tall order.

Good luck Giants, I'll be rooting for you since I hate the Patriots (hate hate hate hate hate Belicheat and Brady).


Now as for how the stimulus plan and the Super Bowl fit, it's easy. With the $1200 families will get (minimum), they can easily afford to pay off the big flat screen HD televisions they purchased with those 12-24 month 0% interest financing store cards. I mean there is a reason why the tv makers such as Sony and Samsung are upping their sales estimates in this supposely downturn in the U.S. economy.

China ripes for future growth

In with the new (capitalism), and out with the old (communism).

After reading Jim Rogers' book on China, I couldn't agree more.

China in its current state, is a producing country. Because of its vast cheap labor and geographic location, China became an ideal location for all types of manufacturing activities. The rise in economic activities brought urbanization to the country. I can't help but think that China in its current state is much like the U.S. back in 1920s. The U.S. then was producing cars, oils, steel, and other commodities. And after WWII, the U.S. slowly became a consumption based economy as everyone moved into the big cities, standard of living rises. And that is exactly what is happening in China now.

Urbanization and economic prosperity will create the new middle class in China. China will then turn into a consumption base economy. As the standard of living rise in China (which will cause a rise in workers' compensation), even the Chinese companies would have to look elsewhere for cheap labor (southeast Asia- Vietnam, Cambodia, or Eastern European countries). This type of economic activities will continue to pass on as companies continue to seek cheap labor. Countries with political stability will follow the footsteps of China- just as how China followed the U.S.

This economics "pass-thru" from country to country is nothing new. There was the Dutch before the period of colonization. Then there was the British during the period of colonization. After the British, it was the U.S.- I can't help but think China would be the next stop. This is a cycle, a capitalism cycle if you will. As companies seek cheap labor and resources to produce, they will go to the countries with the best conditions (political stability). And once the investment pours into that country, the country would prosper. As the country prospers, the standard of living rises- which will cause an upward swing in wages and prices for resources. That country will no longer be competitive for manufacturing activities and it would then turn into a consumption based economy- the manufacturing activities would then move to its next target- benefiting that country the same way it did for the previous country.

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