Archive for December, 2008

Legislating the CDS market?

By: ispeculatornew | Date posted: 12.12.2008 (4:00 am)

The Credit Default Swap had been a market known to very few up untill a few years ago but the recent credit crisis made the market come into the spotlight. It is one of the largest and fastest growing markets in the world, a $15.5 trillion market. A CDS is an insurance on the default of a given bond issuance. the buyer of a CDS will get a payment if the issuer of the bond defaults on an interest or a principal payment. The seller of the CDS or insurance will make the payment.

There are also CDS issued on bond indexes and they have been an important part of the credit market, intially as hedges but as time went by they became an important tool for speculators. Like many more exotic products, CDS started trading as OTC (over the counter) products which was justified as they are highly flexible and no exchange was ready to develop the market.

But over the years, the CDS market has became a lot more standardized and while we probably will never reach a day where all CDS trades can be done on an exchange, there are probably close to 99% of these trades that could be done on an exchange. Why do so? Consider AIG, the largest insurance company of a few months ago. When they got into financial trouble, the US government deemed it could not fail because of its huge exposure on credit default swaps. Why so? Imagine you are any other bank and have many bonds that are insured with CDS trades done with AIG. Suddenly, AIG goes bankrupt and instead of a hedged bond portfolio, your portfolio becomes totally exposed and you can imagine what kind of impact this would have created.

The interest in setting an exchange is that it could function as do futures, so any sellers of credit default swaps would be required to post a margin at the exchange leaving market participants comfortable that they are not at the risk of their trade counterparties failing (counterparty risk) as the exchange would be responsible for this.  Even firms that were reluctant at some point such as Goldman Sachs (GS) are now hoping to move a part of their trades to an exchange, they have estimated they could move over 90% of their trades to such a platform.

“Executives of CME Group Inc. and IntercontinentalExchange Inc. in the U.S., Britain’s LIFFE exchange and Eurex Clearing AG of Germany each assured the House Agriculture Committee that they would provide safe, neutral central structures that would contain risk and manipulation in the market for the swaps.”

Brave enough to be right?

By: ispeculatornew | Date posted: 12.10.2008 (4:00 am)

It’s the first time I actually put up a video on here but it is well worth watching. Peter Schiff is the President of Euro Pacific Capital inc and he has been talking for over 2 years now about the current crisis and let’s just say that he did not get a great treatment when giving such tough predictions for the US economy. There are numerous videos of him and it seems he has been dead right about almost everything so far. The biggest miss I have seen is about gold (which I do not understand either as common sense would have predicted that a world crisis would pop up the price of gold.

But Schiff is still confident in that part as he has predicted oil could go up to as much as 2000$ as early as next year.

And again, no doubt, Schiff looks absolutely brilliant in retrospect and probably made a lot of money to all who listened to him (hopefully he walked the walk).

But that brings up other questions. Trading on fundamentals such as you would have done if listening to this advice can be very difficult. Let’s not forget that for months and perhaps over a year, the market did not go in his direction. The problem is that you must be able to give yourself enough margin for error to sustain losses if valuations do not come back to the correct level. But as in all bubbles, things always go a lot further than you could possibly imagine and that makes it a challenge to be able to sustain the positions.

Then of course lies another problem. If you are holding positions for fundamental reasons and the market is going against you, you will probably reason yourself that it will eventually revert back to what you see it should be. But at what point should an investor simply admit he was wrong and move on? The two problems are important challenges when trading on fundamentals and you can argue that such traders have to be able to tolerate important losses in order to be right in the end. But if that’s the case, positions must be small enough to be able to sustain such losses…

I actually know of a few such traders who had great visions of what was going to happen but actually were not able to profit because they eventually lost so much money that they were fired and never were able to come out on top, simply because their market vision was a few months too early.. tough job hey?

Can someone explain what just happened?

By: ispeculatornew | Date posted: 12.08.2008 (4:00 am)

So Friday morning, 8AM EST, investors are looking at the time as they await the most important jobs report that is to come out at 8:30AM as is always the case. The media has deemed this one very important and the forecasts are very very bleak with predictions of close to 500K in job losses. Wow, depressing isn’t it? But in fact, it turned out even worse than the darkest forecasts, coming up at -533,000 jobs! Wow! I know of quite a few people who were incredibly happy to get a short market position at the market open, and as you can see in the graph above, the market did start to go lower as investors started to feel like once more, we were further than ever from an economic recovery.

But then, markets started turning around and basically went up without many setbacks during the whole afternoon leaving many short investors clueless as to what happened. Are investors starting to think that we’ve reached new lows? True, a lot of stocks do look cheap right now, but even then, it’s tough to see how they could have looked more attractive with such an enormous and disastrous jobs number out. It was the worst number since 1974 in fact.

Sure, the new Obama administration is starting to form and that is giving some confidence to investors about the future. As well, it looks increasingly probable that the government will get a deal done with the big 3 of the auto industry to keep them alive and off of bankruptcy for at least a few more months. As well, Obama has signaled he wanted to make important investments in infratructure in this weekend’s address, you can see it or read about it here. What looks very positive is that many of these ideas (except for saving the big 3) will obviously put the US economy in a better competitive position if it can be more energy efficient, have better infrastructure, etc. These are probably better fixes for the economy than a lot of what had been suggested.

These will certainly be up and down weeks for a while but the fact that such a bleak number did not completely spook the markets tends to signal that a lot of investors think we might have reached the bottom point and that the bumpy ride might start to go in an upward direction…

Investment Talking

By: ispeculatornew | Date posted: 12.07.2008 (7:31 am)

Every Saturday (or Sunday if I had a party on Saturday 😉 ),, The Intelligent Speculator does a review of good read around the blogosphere. Here’s what caught my attention this week:

Find out what Million Dollar Journey learned about the bear market.

Amazing stock picks have been done at Stock Trading To Go. The Guy made 12 picks a month ago and they all went up!

There is a great post done by Where Does All My Money Go on determining the fair value.

How to Create a Monthly Dividend Cash Machine – Associated Content posted at Associated Content.

Price to Earnings Ratio (P/E) posted at Investing School.

Bad News is an Investor’s Best Friend posted at Worldwide Success.

Caterpillar (CAT) Heavy Equipment Time posted at Learn The Stock Market And How to Trade.

Stock Analysis: Entertainment Properties Trust (EPR) A Buy, But… posted at Dividends 4 Life.

Stock Delistings – How to Cope posted at Qovax.

Carnivals:

Festival of Stocks

Carnival of Investing

Carnival of Personal Finance

Carnival of Money Hawk

Money Hacks Carnival

Carnival of Financial Planning

Finance/business graduates? Good luck and welcome aboard

By: ispeculatornew | Date posted: 12.05.2008 (4:00 am)

The lucky ones, those that have came from all walks of life (which is arguable in itself) to study business or finance hoping to join in on the great business of asset management or investment banking. Even a few years ago, when these students joined in, they were looking at what they could get. Graduating from a top ranked school? Then you are probably looking at a lousy 100K to start out and you will be stuck with 400-500K (including bonuses)  before you turn 30 years old. Of course you’ll probably have some student loans but still, not bad. Tough life hey? Yes, I know, you will be stuck working long hours, under intense stress, but it’ll all be worth it.

Oh wait a second, did you say you were graduating in 2008? Ooops, I’m sorry, then let’s change the terms just a bit. Actually, what we have to offer you is a 60K back office job? Oh what’s that, you wanted to do work in one of those hedge funds? Just try giving a call to the companies you applied at.. chances are that half of them are or will be out of business by next year… and the other half? Well, yes sure.

I mean you do not have any experience are only competing with the 50% working for those now dead funds right? And with so many managers and analysts out of work, imagine what great salary negotations you’ll get…

Yes, might want to try to private equity. They are the latest trend right? Borrow huge amounts of money to buy companies and then get rid of valuable assets to then enjoy managing a zombie company. Oh no, forgot to tell you that you can’t borrow anymore, so private equity is dead…

Investment banks! I mean sure, they’ve been around forever, and it takes a long time to go up in the ranks. But they do pay huge bonuses right? Let’s see, we have Bear Sterns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley…. what’s that? Two of these are no more, one was saved and the two others had to convert into regular banks?

Ok ok… you get it now, you are stuck at these big banks. They might not pay as well, but at least you will enjoy a good life, with a stable career, decent pay, great benefits. That sounds like something to settle for without a problem, especially in these days. It’s good that you understand that it’s your best opportunity…  Oh… but did I mention that Citibank almost failed, Bank of America is barely able to swallow their purchase of Merrill Lynch, Washington Mutual is now history.. and all of these banks are announcing new layoffs every day…. Ok maybe not  EVERY day. Sometimes they are stuck announcing bonus and pay cuts or that they are cancelling their Christmas parties… great times hey?

Welcome to the class of 2008-2009!

Trading commodities with fundamental news?

By: ispeculatornew | Date posted: 12.03.2008 (4:00 am)

The graph above, is a graph of the price of Gold, one of two prime examples to my point. Go back a year or two ago, and what were the two resources that made the news the most, gold and oil of course. They are traded in a variety of ways but both are usually seen as a way to trade macroeconomic and geopoliticals factors.

Oil has generally been seen as representatitve of the general state of the economy, so as the economy does well, demand for oil will increase and the price will go up and when the opposite happens, there will of course be demand destruction resulting in lower prices. Now of course there are other factors such as the output by OPEC, but that is what was generally seen. But then, the extreme movements of oil in the past 2 years have brought up a lot of different questions as specialists wonder what is causing all of these movements. A lot of accusations of market manipulation (by hedge funds, etc) have been brought up, even by regulatory organisations. And while the rise seemed difficult to justify, the recent decline is just as difficult to understand. Are we in a tough time for the world economy? Absolutely.. but the price going down over 60%.. really?

And then gold prices have acted even more strangely. A couple of years ago most specialists would have told us (and did!) that gold was the “refuge asset”, going up in times of uncertainty and down when the economy would suffer.

But then, look at the graph, what in the world happened? How did gold go down so drastically in recent months when it was the one resource that was supposed to rise in such circumstances? Sure, there are ample explanations such as the one that gold has an almost direct inverse relationship to the US dollar. And that might very well be the case. But it becomes very difficult to trade when every time gold or oil goes in a different direction, a new explanation comes out.

Is it possible that trading volume has gone up so much that the prices are driven mainly by hedge funds, fears and beliefs instead of actual ask and demand? It sure looks like we could spend a lot of time trying to figure out what is moving these markets. And perhaps more than anything, trend trading (to be discussed soon) might be the best way to trade these markets nowadays as their movements are discussed so much that a lot of investors are jumping on the bandwagon making the movements a lot more extreme than they should be.