Archive for the ‘Financial Knowledge’ Category
The Whole Issue with Greece (Advance)
Greece and her budget problems has been in the news for some time now. The issued started way back in 1999.
Greece, which had an increasing budget deficit (where spending is higher than income) that cause it to fail the criteria for joining the single European currency in 1999, joined the euro in 2001. Member nations must keep deficits at less than 3 percent of GDP and trim national debt to less than 60 percent of GDP under the pact.
Do investors really need Structured Products?
I recently started working for a new client and was also providing advise on financial assets he has invested through banks. There is one particular Structured Product he entered into. Due to the complexity of the product and knowing that the client, who is in the medical field, has little knowledge about financial markets, I asked him what went on during the purchase process and how he arrived at the decision.
As expected, he cannot recall very clearly what was communicated and how the decision was made. However, what he remembered clearly was that the capital for the investment was protected and that the 1st year interest is guaranteed. Here’s the term sheet and the description. 20-yr JPY Swap
Now, my thinking are these. Firstly, it is my thinking that as the market gets more sophisticated, structuring teams of banks use their creativity to row out Structured Products clients can invest in. As the bank employees have increasing interest and ” sense of achievement” in mastering complex information and products, there was a disconnection between where developments are heading and what the client really needs. Do a client really need to enter into a Interest Rate Linked Structured Deposit tied to 20-yr JPY swap rate?
What’s Berkshire Hathaway’s expected life?
Published in Reuters, contributed by Felix Salmon on 17 Nov 2009
Berkshire Hathaway has a lot of equity: its book value is about $125 billion. And since equity is forever, it makes sense for Berkshire to have a very long time horizon when it comes to buying assets. But still:
Berkshire Hathaway Inc.’s Warren Buffett, who agreed to buy Burlington Northern Santa Fe Corp. in his biggest takeover, said the railroad’s results in the next 100 years will justify a $26 billion bid that’s “not a bargain.”
“It’s a good asset for Berkshire to own over the next century,” Buffett said in an interview with Charlie Rose.
It’s refreshing to see the 79-year-old Buffett taking such a long view. But the fact is that Berkshire Hathaway is not going to exist in anything like its present form in 100 years’ time. It’ll probably last no more than 10 years after Buffett dies before it’s broken up into various component parts. And when he gives quotes like this to Charlie Rose, it seems as though he’s somewhat in denial about what his legacy is really going to be.
The minute that Buffett dies, Berkshire becomes a large conglomerate, and will trade, like all conglomerates, at a discount to its sum-of-the-parts valuation. Sooner or later, Berkshire’s CEO will be persuaded to monetize the difference, and the storied company will come to its natural end. That’s no bad thing: it’s intrinsic to the nature of capitalism, which Buffett loves. But it does mean that buying companies on a 100-year time horizon is somewhat unrealistic.
Read the comments here
When the smart people works for Wall Street
Wall Street Smarts
Interesting opinion from a random guy the author met. I’ve never thought of this, but like him, I cannot find a compelling flaw to the theory. I am not sure what the smartest guys from my dad’s generation, born around war times, do as their profession. Maybe doctors, businessmen, teachers. Is there even a demand for banking people then? However, I do know that the smartest people works in banks now. Can’t imagine the cream of the crop working for the government or MAS…
First of the G20 banks to rise interest rates – Reserve Bank of Australia
The RBA surprised markets with a move overnight, becoming the first of the G-20 banks to hike interest rates. And even though Australia was increasingly leaning toward a hike, there was more than enough surprise to pull AUD significantly higher vs the broader market. This and renewed risk appetite brought AUDUSD within touch of 0.8900, a new high since late last summer. The 2-year interest rate differentials for the US and Australia are still a tad below the highest level from September, however, then AUDUSD was trading a bit lower, so the direction for AUDUSD after the immediate kneejerk here will still depend on a further widening of the differential and continued robust risk appetite. In other words, it’s all priced in at the moment.
The RBA explained its decision as a result of an economy performing more strongly than expected and an inflation outlook in which “inflation will not fall as far as earlier thought.” The RBA also mentioned that Chinese growth has been very strong. On the strength in the Aussie currency, the RBA simply noted that the currency was strong and that its strength was “considered”. Lack of concern on the currency was also a green light for the Aussie bulls. Barring any exogenous shocks, the RBA is likely to hike at its next two meetings as well.
Stocks Likely to ‘Catch Up’ With Corporate Bonds
By David Wilson
Sept. 22 (Bloomberg) — Stocks offer greater value than bonds and are poised to “catch up” with a rally in corporate debt, according to Rod Smyth, chief investment strategist at Riverfront Investment Group LLC.
The difference in yield between corporates and 10-year Treasury notes has narrowed more quickly than the Standard & Poor’s 500 Index has risen since March. The yield comparison is based on a Moody’s Investors Service index of Baa-rated debt.
Since December, the yield gap has fallen to 2.9 percentage points from a peak of 6.2 points, according to data compiled by Bloomberg. This spread is near its lowest level since January 2008, when the S&P 500 was about 22 percent higher.
Spreads have narrowed so much that stocks have more room to rise than bonds, especially as earnings increase, it added.
Smyth isn’t the only strategist whose focus has shifted to shares. “Equities no longer look expensive relative to corporate bonds,” Andrew Garthwaite, a global strategist at Credit Suisse AG, wrote in a Sept. 18 report. He downgraded credit, or bonds, based on relative value.
Barry Knapp, a U.S. strategist at Barclays Capital, drew a similar conclusion last week. Stocks have more to gain from the economic recovery that’s now in progress, he wrote in a report dated Sept. 14.
Overlooked risk in Bonds.
The low interest rate environment that may have kept the financial system alive, but it really seriously hurt savers. I’m talking about real savers, not investors. People who place money in the banks every month trusting that at the end of their working life, they will have a comfortable retirement.
Last checked, you will get less than 1% on a 1 year fixed-deposit and that is for a minimum amount of around $10,000. With inflation at above 4% the last 2 years, many people who worked so hard to save money are desperate for yields now.
Is it any wonder that bonds and bond funds performed so well this year? Globally, investors sank over $40 billion into bond funds in August, an all-time high for a single month, and are on pace to break that record again in September. For this reason, Stocks Likely to Catch Up With Corporate Bonds
A few important points to note.
When is the best time to invest?
The answer to that question is NOW! Here is the 3 possible scenarios U-shaped recovery, V-shaped recovery, W-shaped recovery and why.
drawn on MSCI World Index, area circled is NOW.
I’m not saying if you have $200 thousand, you should go dump in all into investment tomorrow. As one of the risk management strategies, break it up into a few tranches. It is impossible to time the market to the exact day. You would have been incredible if you can catch the low prices of a few months. Based on 3 assumptions: that there IS eventually going to be a recovery; your time horizon is 3 years or above; and you haven’t lost all your liquidity.
Of course, risk management and liquidity management applies. We do not have a gambling problem.
Greed of Wall Street – Goldman Sachs
There has been much controversy over Goldman Sachs recent success despite the sub-prime, financial and subsequently economic crisis. I believe most of the fuss, at least at the consumer level came about with this piece by Matt Taibbi, writer with Rolling Stone. It is strange, I always thought Rolling Stone is a magazine only rockers and emo-kids get from HMV.
The Great American Bubble Machine
Gist of the article
Goldman has a part to play in the Great Depression by playing up investor sentiments thought layers of investment trust.
Goldman’s underwriting standard and tactics for IPO were questionable. Amidst all the enticement for investors to subscribe, they knew the companies were worthless and protected themselves from any losses.
Similarly, Goldman knew the sub-prime mortgages packaged into CDOs would default not long after they started structuring them. Goldman continued to sell them while having a short position in the CDOs.
Through influence they have in the US government, therefore regulations in commodities trading, they are able to manipulate the market. Goldman released analyst reports and forecast for oil to reach US$200 a barrel.
Through this influence too, they are able to rigging the bailout, receiving funds and payment from AIG, letting competitor Lehman Brothers collapse and finally totally unharmed and extremely profitable. Taibbi also has a problem with the fact that Goldman paid so little tax in 2008. US$14 million in tax while paying out $10 billion in compensation and benefits and made a profit of more than $2 billion.
The next big global bubble to be exploited is the carboncredit market. Goldman has been positioning itself to push for the legislative approval for the framework and opening a market for carboncredit. Same reason why oil trading disrupts supply/demand, Goldman wants a big slice of the pie.
Conclusion, Goldman has been inflating bubbles around the financial assets to profit from it and has influence to do so.
Nice piece, I wish I had the narrative gift of Taibbi. However, technically, it has a lot of flaws. Goldman is just better at making money this time round. Many financial institutions are involved in the tech bubble and oil trading as well, and profited from it. I believe that there might be some bending of ethical standards in Goldman’s pursuit of profits, but the conspiracy theory is hard to swallow. Furthermore, the much information and details are that are pieced together have little relevance to the issue.
If you are not afraid of being even more confuse, you can read a view by another columnist. Then again, I’m not sure she is in the finance profession.
