Monday, December 29, 2008

Inadequacies in Fundamentalist Approach to Investment Risk Management

Dear Friends,

John Authers' "Short View on the of UK Financial Times website has always been excellent, and I never miss his ideas and opinions. Like any market participant, I may not agree with all his views, but I have always found his ideas to be interesting, and worthy of consideration and deeper critical reflection.

In this regard, I would highlight his Special Video Presentation entitled "Escaping the Damage" for your viewing and more importantly, to challenge your current basic assumptions about investing and risk management strategies, especially so, if you are a Fundamentalist.

Portfolio Diversification is considered the main approach to Risk Management in the Investment World adopting the Fundamentalist Approach. The Fundamentalist Approach invests a disproportionate amount of time, effort and money, in identifying "good" investments, i.e. WHAT to Buy, and they usually acknowledge that they cannot manage the timing of their market entries and exits very well.

In fact, most Fundamentalists believe that it is not possible to manage market timing, i.e. WHEN to buy or sell, with any reasonably reliable degree of accuracy and reliability. Thus, Investment Risk Management is a function of
  • identifying good stocks and buying them at a discount to their Intrinsic Value;
  • holding them for the long term, based on the assumption that in the long term, stocks will outperform other assets, and
  • Portfolio Diversification, i.e. buying a variety of types of stocks (Large Capital vs Small Capital, Growth Stocks, also called Green Chips vs Value, normally the Blue Chips) in different markets.
The Fundamentalist Approach presumes, rightfully or wrongfully, that if you adopt this strategy to Risk Diversification, you would do well in the long term.

John Authers' presentation above shows that whichever Portfolio Diversification Approach you adopted, i.e. Growth vs Value, Large Cap vs Small Cap, or Markets of US, Japan or Europe, the performances of the funds are about the same. This means that you would have lost a lot of money; but more importantly, the losses are about the same, whichever Portfolio Diversification Risk Management Strategy you adopted.

This blog, together with Chuck Jaffe's video clip discussion on the performance of the 2010 Target Life Funds and Legg Mason Fund in my earlier blog entitled The World has Changed, So Must Your Basic Assumptions demonstrates the importance of managing key assumptions in a changed world.

Today's blog is not a proposal that the Fundamentalist Approach is wrong, or that the Fundamentalist Approach is dead. No, today's blog's objective is to encourage you, my friend, to think carefully, as to what approach works under what conditions, and why, so that the right winning approach is adopted at the right time.

Never fall in love with any one theory on investment. Just as a carpenter requires more than just a hammer, so does a market participant.

As already highlighted in my blog entitled The Three Strategies for Investment / Trading Success,we need to consider the
  • Economic Cycle and World Economic Situation, which is the Global Macro Strategy,
  • Fundamentals of a Particular Industry and Stock, AND
  • Technical Analysis
Failure to understand any one of the 3 strategies may lead to disastrous performance results in the financial markets, especially in abnormally, troubled economic times like today.

There will come a time, when Buying & Holding Good Stocks for the Long Term, will make sense once more, especially with a Dollar Averaging Strategy to help manage the ups and downs in market conditions. However, I urge you to reconsider this approach today, in view of the high level of uncertainties plaguing not only the economy, but industries and individual stocks.

The only time when you can be really successful on a consistent basis, in adopting the Fundamental Approach is when two key conditions are fulfilled: -
  • The World Economy is Growing, i.e. a Positive Sum Economy, and
  • High Probability of Reliability in Profit & Business Performance Forecasts.
Obviously, today, we are still in a Negative Sum Economy, i.e. in an Asset Deflation Environment, and most enterprises can't even forecast their own business performance, let alone normal investors with less information.

Old habits die hard. Long entrenched values and beliefs will always be cherished and held on to. To challenge such values, beliefs and assumptions, is to provoke havoc in a person. However, it is necessary, if we are to perform well under extraordinarily abnormal conditions.

I hope that I have provoked such uncomfortable thoughts in you; not because it is fun for me, but because it may save you some losses, or better still, it may make you some money. Of course, the final decision is always yours, and you will live with the decision, or the omission of a decision.

Best wishes,

Ooi
© Copyright 2008 of Praesciens.Blogspot.Com.

Wednesday, December 24, 2008

Rachel Maddox on the Mismanagement of the TARP Fund

Dear Friends,

I have always loved the video clips of the Rachel Maddox Show, as she is very witty, and yet, provides valuable information. You can view from MSNBC.Com, although I have not highlighted a single one of the videos, as it tended towards politics than financial markets news.

However, this video clip published today, 23rd December 2008, is a key exception. It highlights the ridiculous nature of how TARP (Troubled Assets Rescue Plan) is being managed. Form your own opinion after you have viewed the video. Some people might even get very upset after watching it.



My personal understanding of the situation is that the money is replacing money already lost by the financial institutions, and thus, how do you spend money that has already been spent?

How was the money spent? It was spent investing in toxic assets like CDOs (Collateralized Debt Obligations, which is related to Sub-Prime Mortgages) or CDS (Credit Default Swaps), or already loaned out to borrowers. Now, due to the losses, the banks have become undercapitalized.

This is one way of saying that should there be some major deposit withdrawals, the banks will not be able to repay the depositors back their money. Thus, the money received from TARP is merely a replacement of the liquid cash position that the banks should have, which they had lost due to bad loans or investments in toxic assets. This is why, the banks will never use the bailout money to give out more loans.

Did Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke know this when they gave out billions of dollars to the financial institutions? What do you think?

If a small guy like me, writing a blog can understand the situation so well, without even reading the confidential documents submitted by the financial institutions to the government, do you think the two most powerful men in the US financial world doesn't know what they are doing?

My personal opinion is that the bailout money is just that .... bailout money, which was never meant to encourage lending, however it may have been put across to the American taxpayers in the past few months.

The other issue is how the bailout money is spent, in terms of remunerating some of the key employees, including the CEOs of the Financial Institutions. Check out this Interview of CNBC's Erin Burnett on "How Wall Street Uses Tax Dollars" from MSNBC.Com.

Best wishes,

Ooi

Tuesday, December 23, 2008

How to Live Life After Retirement - A Personal View

Dear Friends,

If you are retiring rich, and don't know what to do with your life after an illustrious career, here's an idea from Wall Street Journal's article on Jay Woodworth in his quest to build a Model Train Empire, called Woody's World.



Now, that's what I call life! For those with less money, but want to emulate Mr. Woodworth, you can check out the Railroad computer simulation games "Rail Simulator" or the famous classic from Sid Meier, "RailRoad Tycoon 3".

Life is not solely about playing computer games. But, computer games is one of the most entertaining and mind stimulating ways to live your life after retirement, at least where I am concerned.

While we are at it, I might as well list down my favorite computer games that I have played, and the games I want to play, if and when I have the time.

The best computer games I have ever played in my life thus far, are: -

1. Business Simulation Game
2. Koei's RTK II (Romance of the Three Kingdoms)
3. Simcity 2000
4. Sid Meier's "Civilization"
5. Sims 2
6. Total Club Manager 2005

The Business Simulation Game was the first computer game I got extremely hooked on. This was way back in the mid to late 1980s. It had minimal graphics, and was played on the first computer I owned, an IBM XT 80286 with a 8MHz Intel Processor without a hard disk. Thus, the game ran on a 5 1/4 inch floppy disk, with only 586K of RAM.

Those were the days when you are known as a computer expert if you can use Lotus 123 and Wordstar word processor. I used to develop Payroll and Time Billing Programs using the macro commands in Lotus 123, back then.

The game puts the gamer in the position of CEO of a new start up of a technological company, not unlike Apple in its first years of operation, with only $500,000 paid up capital. You have to buy production capacity, decide on number of production labour shifts and quantity of goods to produce and keep in stock, as well as the sales pricing.

It also required decisions on investments in marketing advertisements expenses, as well as R&D, through different phases of market maturity for each product category. R&D can prolong product lifecycles, as well as bring on new products into the market. At a more advanced stage, it also required geographical expansion into other territories, and the competitive advantage of being a First Mover in a new territory versus being a Technological Leader in a particular product category.

For a game that is probably the very first in the business simulation category, it had very sophisticated modelling of the effects of marketing investments, R&D Investments, impact of Economic Booms and Busts, right down to cashflow management. A wrong decision will cause bankruptcy for the firm.

The game was so good that it was subsequently used by a number of universities to provide simulation experience for business degree students.

This game was an instant hit with me. I spend hundreds of hours experimenting with all kinds of business ideas to fight the competitors and improve the share price of the firm I was managing.

I finally stopped playing the game for two reasons. First, it was no longer challenging. I had managed to consistently, i.e. every time I play the game, win against all 4 other competitors by a mile, ending up with millions of dollars in personal fortune from my own stake in the company. Second, and the most important, technological progress made impossible to run 5 1/4 in floppy disks unless I wanted to invest in one, solely just to play the game.

RTK II is a computer simulation of the world during the Later Han Dynasty, i.e. around 189 AD to 260 AD. I played the game for about 4 years before computer technology made it obsolete to continue booting the program up on 5 1/4 inch floppy disks. If I remember correctly, I started playing this game in 1990.

I tried many different strategies to conquer China, and probably spent more hours on the game than I did studying any one single subject for an exam! Such is the addictiveness of the game, although it had only very simple graphics and played on the IBM 80286 and 80386 machines.

I did not manage to play RTK III and RTK IV due to work commitments, and after that, KOEI stopped producing the English version of RTK as a PC Game, although it continued to do so in the Playstation market.

Thus, it was with tremendous excitement that I found out in July 2008 that Koei would finally be producing an English Version RTK XI for the PC Game Market. Naturally, I bought a copy of the game soon after it was published, and I am happy to report that I am not disappointed by it, although due to time constraints, I have yet to finish the tutorials in starting to play the game.

From what I have seen of the game, it is much, much more complex than RTK II, and with a lot more degrees of freedom to craft strategies to win / lose. I expect to spend many years playing the game, from many different perspectives and strategies, trying out one scenario after another. Already, I have four uniquely different strategies to test out, and I haven't even got started yet. Life cannot be anything but exciting over the next few years, with this game installed on my PC.

Sim City 2000 is a simulation game where you set your own game objective, unlike other normal games, where the game objective is set for you. It is about you being the Mayor, responsible for Urban Planning & Economic Development of your own city. The economic model is so realistic that some universities require students to do a project with Sim City 2000 before they can graduate. If I remember correctly, I started playing this game in 1992.

I spent equally as much time on Sim City 2000 as with RTK II. I read up on various economic theories, and tested the economic model under different economic conditions.

In one scenario, I rammed up the development of the city, not unlike what Dubai has done in the last 3 years, pouring a lot of money into infrastructure development. For a few years, while the money and government spending was forthcoming, the City enjoyed an unprecedented economic boom. Subsequently, when the money ran out, and I needed to consolidate the City's finances, and start paying down the debt burden, which had become a strain on future growth, the economy went into doldrums, and many parts of the City became a ghost town.

Will this be the fate of Dubai after the City starts consolidating its Government Spending? I don't know, but based on my economic simulation with Sim City in the early 1990s, this was the most likely result. Maybe, the Dubai Economic Council had better play Sim City before they make another decision? Haha, just kidding.

I also tested the Keynesian Economic Model under poor economic conditions. Of course, if Government Spending is increased on the City, the economic growth will improve. And if we apply Keynesian Economic Stimulus at the right time, i.e. when the City needs it the most, this is probably the medicine the doctor ordered.

However, the key to Keynesian Theory is not whether one should apply the Theory, but where one will find the money to implement the economic stimulus. This was the key learning experience from many months of simulation testing. Thus, it was necessary that in good times, the Government save and develop the necessary Government Budget Surplus so that it can spend and stimulate the economy during the rainy days.

Alas, this is not to be for most countries, including the USA and UK. Most Governments spend during normal and even during booming economic times. And when the economy is in trouble, they spend even more. So, when does a Government ever save? Practically NEVER, for most Governments. This phenomenon, I attribute to being a weakness of Democracy, i.e. to get democratically elected, the President / Prime Minister must spend, spend, and spend some more, to please the voters and his key political supporters.

In my humble opinion, all Presidents and Prime Ministers to be, must be made to play Sim City and not allowed to stand for election until they have successfully managed the City, by taking it to greater heights, sustaining economic growth, whilst achieving a Government Budget Surplus in the process. Hahaha, that would be the day, wouldn't it?

Sid Meier's Civilization was the next game I played with equal enthusiasm and time investment, as RTK II and Sim City 2000. This was probably in 1993 or 1994. Sid's Civilization appeals most to the average schoolboy who wanted to play a war game.

Again, I tested out various scenarios, including the hypothesis that the British were once a great colonial power because they are an island nation, and with naval supremacy, they could protect their own shores and live in peace for many years, while they expand their empire.

I also tested out an even more remote scenario of the US, i.e. the hypothesis that it was on a completely different continent, away from the European stage of World War II that it emerge dfrom WW II as the Super Power of the World.

Yes, in both scenarios, I actually managed to make both hypothesis work.

Of course, I also tested out other hypothesis, for example, a Hitler War Mentality, robbing neighbouring countries, for resources, rather than concentrating solely on building my own. Another was to be as peaceful as possible, but to deter war against a neighbour who adopts an aggressive War Mentality, i.e. the American Hypothesis that to prevent war, you have to be superior militarily.

Again, Yes, I am happy to report that both these scenarios worked. BUT, sometimes, even if you try your best to live in peace, you may be plunged into war, due to the actions of others. Also, there will be times when you have to take a stand and fight, no matter how peace loving you may be, by nature.

I stopped playing computer games for a few years after that, except for Sims and Sims 2. I found the simulation game extremely interesting and addictive, and so did my wife, who is never interested in any computer game, with this single exception. It is her dream to play Sims with me, when we are both retired. Haha! Finally, after a few thousand computer games had been published, we find one single game that we can play together.

We spent a few hundred hours together playing this game. It is addictive, and the most crucial learning point of this game is Time Management. If you play all the while, you will not be able to move forward in your career. If you focus solely on your career, you will not be happy. Etc., etc., etc. Life is interesting when you start interacting with the unique characters in Sims, and start dating!!! I understand that in Sims 2 or was it Sims 3, you can even get married and have children, with your genes! Wow! We haven't got that far.

However, my wife found the game too addictive and thus, taking too much time, and we stopped playing, so that she can get back to normal life.

Ok, ok. The million dollar question you guys want to know right? Did the game bring us closer together? Yes, sure did. It is one thing to play the game; it is another to enjoy and interact with your loved one, while playing it. Quality attention time, as far as the wife is concerned!

Since moving on from Sims 2, I have been playing only two games exclusively over the last 4 years, i.e. FIFA Manager 2002 and Total Club Manager 2005.

These two soccer management simulation games puts me in a position of Arsene Wenger (Arsenal) or Sir Alex Ferguson (Manchester United), if I wish. However, I find it not interesting to manage the world's greatest clubs, which is already successful.

Thus, all my playing time, which probably equals the total time I spent on the other games thus far, is spent playing as manager of various League 2 teams. The big question I wanted answered was, "How difficult is it to manage a League 2 team, and make the dream of getting promoted, year after year, to League 1, and then, the Championship League, and then, to the Premier League, and then, win not only the Premier League ahead of Chelsea, Manchester United, Liverpool and Arsenal, but also the European Championships and the World Club Title.

In my four years of playing TCM 2005, I managed to do that only once, and in the process, amassed a huge capital of more than 50 million pounds in cash. This may not sound like much, especially today, when a single Cristiano Ronaldo is probably worth more than that, but for a struggling League 2 club, with only 500,000 pounds at the start, and a whole bunch of "not so skillful" players, this is an achievement I can be really proud of. What's more, I needed to build the stadium from a 9,000 seating capacity into a 45,000 seater, in the process.

Despite the many years, invested in playing the game, I still cannot make the Youth & Reserve Team development strategy work well. Is it the game simulation model, or is it me? Or, is it the way, the world really works?

In recent times, I have been experimenting with player development and trading of players at a profit in more detail, as a strategy to quickly grow the club's financial strength, without sacrificing the club's promotions prospects. I noticed that I am not able to become the Champion of the Division, with this strategy, but I do get promoted, and in the process, I achieve my key objective, which is financial strength from the very beginning, whilst attaining promotion to a higher division each year.

In the past, I have been able to achieve winning a promotion in each of the division played, but at the risk of bankruptcy, from overspending on good players. To be able to win, whilst minimizing risk, through stronger and stronger cash position, is an important part of football club management. Yet, if we do not invest enough in quality players, can we continue to win, after we are promoted to a higher division?

For me, the challenge is not in managing a team with Cristiano Ronaldo, Wayne Rooney, Ryan Giggs, Paul Scholes, Gary Neville, etc. For me, the challenge is in building a completely unknown team, from 4 divisions away, into a world class force, that consistently beats the team with such elite players, and in the process, have millions of pounds in cash.

In this regard, I am very curious, and excited to be able to try out FIFA Manager 2009, for a few years, to see if I can improve on my football club management skills.

As you can see, I am very biased in my selection. I only play Strategy and Simulation games, and are not interested at all in Shoot Them Ups, and other arcade action games.

Neither am I interested in Futuristic games like Galactic Civilizations II which is supposed to be one of the hottest turn based strategy games today, or the extremly popular Role Playing Game, World of Warcraft .

Maybe one day, I may explore, but not in the foreseeable future. However, if I ever do stray from my standard genre of Turn Based Historical Strategy Games and Simulaton Games, it probably would be the Strategy Simulation game that enables me to explore possibilities of a nuclear war between USA and the Soviet Union, entitled World in Conflict.

When I play a computer game, I play the same game for years, trying out many different strategies and scenarios to satisfy my curiousity of what will work, under what kinds of conditions. For me, the results from the simulation testing of ideas and the learning, is the satisfaction I gain from playing the computer game.

For the next two years, I envisage that I will only play two computer games: -

1. Romance of the Three Kingdoms XI (Koei)
2. The FIFA Manager 2009

However, I hope that one day, I can play the following computer games, or their later editions: -

Strategy Games

1. Sid Meier's Civilization IV: Colonization
2. Europa Universalis III
3. World War One
4. Commander: Napoleon at War
5. Spore
6. The Political Machine 2008

The choices from No.1 to No.4 are quite obvious. They are all strategy war games of different eras. Spore should be interesting because it is a game on the Theory of Evolution, i.e. from one single cell, evolves all other beings on the planet. I don't know much about the game, but I think there are many things I will learn, and many ideas to test out on this game.

As for "The Political Machine 2008", well, who doesn't want to test and learn how he can be the next Obama? At least without having to spend his own money in the campaign process. Haha.

Simulation Games

1. SimCity 4 (Simulation 2003)
2. The Sims 3
3. Roller Coaster Tycoon 3

The first two choices are obvious from my earlier comments. It is not easy to find a good business simulation game that can match the Business Simulation Game I first played. Hopefully Roller Coaster Tycoon 3 or later versions will provide some interesting challenges, with complicated business modelling for me to try out various business strategies at a much more advanced level.

Sports & Other Simulation Games

GTR Evolution (Sports)
Title Bout Championship Boxing
Tiger Woods PGA Tour 2008
Microsoft Flight Simulator X
IL-2 Sturmovik

These games are all about fun, fun, and more fun. Yes, even I do like games that are really fun, but not "Shoot Them Ups".

GTR Evolution is supposed to be one of the best car racing game simulations, and I can't wait for the day when I can buy a sophisticated steering wheel with a gearbox system, gas and break pedals that will allow me to fulfil my fantasy to be the next Michael Schumacher. Currently, it cost about US$7,500 to set up a full system, and I can't wait to make enough money, to afford such a system one day.

I don't think that I will ever indulge myself in car racing in real life, so this is about "As Good As It Gets", with this sport.

Boxing has always been of interest, although I find real life boxing too boring, especially if there are no knockdowns. Thus, I would rather play the game, "Title Bout Championship Boxing" than watch the real action. In this way, I get the key action scenes without needing to wait too long. Hopefully it is not disappointing.

As for Tiger Woods PGA Tour 2008, I can't find a better way to enjoy the views of the various famous golf courses in the world, without actually going there. The game provides some interesting challenge in the process, although I am not so much into golf that I would aim to keep playing the game to the extent that I can beat Tiger Woods, even on a computer simulation.

The aim here is to enjoy and experience the scenery that each course provides. However, I am interested in the strategy to play each round in each of the course. This can be learned from the computer simulation, which is sufficiently realistic to me.

The last two games are about flight simulation. I want to learn to be a pilot on a commercial aircraft like the Boeing 747, or the latest Airbus 380, and enjoy the breathtaking scenic views from the top of the world.

I also want to experience being a fighter pilot in World War II. These two games give me a chance to live a different life that I will never experience in real life.

Adventure Games

Leisure Suit Larry: Magna Cum Laude
The Longest Journey

Lastly, if I ever live life long enough, to get around to playing Adventure Games, there are two that I am keeping an eye on. The first, which has always intrigue me, is living the life of a despondent, i.e. Leisure Suit Larry, with all his sexual escapades! Haha, what you can't do in real life, at least you can try on the computer - Safe .... without the danger of Aids.

Next, "The Longest Journey" reminds me of the Arnold Schwazenneger movie, "Total Recall", where you live a life of fantasy, by going for an adventure of your dreams. Why not make life a little more exciting by experiencing what you will never experience in real life, and probably don't want to go through the real world trauma?

If one day, I managed to play all these computer games listed above, I definitely have made it financially many times over, because, finding the time to play all these games, especially with the intensity that I play a single game, will take me years of playing time. When I play a computer game, it is about quality of the time spent, not the quantity of the games played.

I know for sure that my old age will never be boring or lonely, because I have this computer gaming world that will keep me intellectually stimulated. Computer Gaming is not everything, and can never replace the joy of human interaction.

However, in times when there is personal space and time, it is one of the most enjoyable ways to spend my time, at least from my perspective of life today. This is one way, I take time to "smell the roses" and enjoy my life doing the things I want to do.

Best wishes,

Ooi

The World has Changed, So Must Your Basic Assumptions

Dear Friends,

Everywhere I go, the people I meet still work on the same basic assumptions about the financial markets (in particular, the stock market). The most important of these basic assumptions is that "if I invest in the Long Term, the market will eventually come back, and I will make money".

However, it is the same basic assumptions that caused Bill Miller's Legg Mason Value Trust Fund to be one of the top UNDER Performers in the Fund Management Industry, losing more than 50% of its portfolio capital this year alone. This made Chuck Jaffe of Wall Street Journal to award the Fund, the "Lump of Coal: The Fund (Mis) Manager of the Year Award.



Similarly, this WSJ Chuck Jaffe's video clip reported that "2010 Target Fate Lifecycle Funds " were supposed to protect highly conservative investors from big variations in fund performance, but instead, it lost a lot of money for investors, at a time very close to their withdrawal timeline.

What is the lesson to be learned here? It is that

"The World has changed, so must your basic assumptions."

Best wishes,

Ooi

Never Borrow Money to Finance a Project with No Returns!

Dear Friends,

What a sad story! Today's Wall Street Journal (WSJ) reports that even churches are being auctioned in the USA; not one or two, but more than 10, all at once, in the article entitled "In Hard Times, Houses of God Turn to Chapter 11 in Book of Bankruptcy".

One story talks about promised money from churchgoers that never arrived. In fact, the churchgoers stopped going to the church thereafter, and thus, the particular church could not meet its financial obligations to pay its loan borrowed for the expansion of the church.

The issue here is not about the church per se, but about how we manage money. The lesson to be learnt here is that we should never borrow money to finance projects that do not generate a Return on Investment.

In a similar vein, we should not borrow money to renovate our homes. If we have the cash money to do it, by all means. If not, wait till we have the money.

The same goes for the Government of any country. Many Governments spend on all kinds of construction projects without taking into account how they will repay the money they borrowed to finance such projects.

Hopefully, we have learned a useful lesson. Let not this sad story go to waste, by making the same mistake some day.

"Neither a borrower nor a lender be".

The only exception - when there is a realistic, attractive Return on Investment on the borrowings that enables us to repay the loan.

Best wishes,

Ooi

Monday, December 22, 2008

Merry Christmas!

Dear Friends,

A very Happy & Merry Christmas to you and your family. May you always be happy and healthy, and may all your dreams come true as soon as possible.

In the meantime, do something nice for someone who needs your help. If each of us help one other person, this Christmas will be a wonderful time for all.

Here's the song "White Christmas", sung by the Drifters with Bill Pinkney on Lead Bass and Clyde McPhatter on Tenor. The cartoon was created by Joshua Held. Pretty cool!

Or listen to the dreamy rendition by Michael Buble.

Or .... the crazy but fun version from Robbie Williams & gang!

Relax and Enjoy!

Best wishes,

Ooi


Drifter's Cool Rendition of White Christmas -



Michael Buble's Dreamy Rendition of the classic White Christmas -



Robbie Williams' Crazy but Fun Version of White Christmas -

Thursday, December 18, 2008

Bernie Madoff US$ 50 Billion Scandal

Dear Friends,

We thank MSNBC.Com for this video clip. CNBC's Trish Regan gives us a report on the Bernie Madoff US$50 billion Scandal, possibly the biggest financial fraud in terms of amount ever in the entire history of the world.

Everyone in the world seem to think that such things happen everywhere else in the world, but NEVER in America; and yet, this is happening in America, one blow up after another. The latest is that people are outraged that a woman who embezzled US$2 million is not allowed bail, but Madoff with a US$50 billion con job, gets to walk out of jail .... not exactly free, cause he had to post bail, but hey, with US$50 billion, who can't post bail?

What's the world coming to? Sigh .... we need to listen to Mr. Sandman again, just to sooth our nerves .... this time to avoid being upset. :)

Best wishes,

Ooi



Here is a video clip discussion of the damage done by Bernie Madoff from MSNBC.Com.



MSNBC.Com's video clips on Bernie Madoff''s Victims: -





Should Auto Industry be bailed out?

Dear Friends,

An excellent plea for a bailout of the auto industry by Senator Debbie Stabenow of Michigan from MSNBC.Com.

Best wishes,

Ooi

Wednesday, December 17, 2008

Fed has Probably Made Its Biggest Blunder

Dear Friends,

Mr. Bernanke's move to bring down the Federal Reserve Funds Rate to a range between 0% to 0.25% p.a. has had mixed reactions from the world. On the one hand, the Reuters article dated 17 December 2008 entitled "Bernanke voted best in dealing with Crisis" seem to suggest that there are a number of economists that agree with such a Government Policy.

On the other hand, the CNBC article dated 17 December 2008 entitled "Pros say Fed move will create a Bond Bubble" suggest that the Fed may have gone "A Bridge Too Far" on this action to revive the struggling economy.

Andrew Busch's guest blog on CNBC, dated 17 December 2008, entitled "Fed gives Short Term Gain, Long Term Pain", suggest that Americans and maybe the world, will probably live to regret the Fed's decision.

How do we make sense of all these conflicting opinions?

Let's examine the facts. Fact 1 is that the US Economy, and the World Economy for that matter, "has fallen off the cliff", to use the phrase that is now commonly thrown around on CNBC. In short, the economy is in very, very deep trouble.

Fact 2 is that the Federal Reserve has cut its Fed Funds Rate from 5.5% p.a. slightly over a year ago, down to 0% today. It is clear that cutting interest rate has not worked to revive the US Economy. If anything, the US Economy has worsened since the first cut in interest rate.

It is probable that there has been some positive effect achieved by cutting the Fed Funds Rate, in the sense that the loans rate could have been much higher had the interest rate not been cut. However, it is also clear that cutting the Interest Rate will not spur an economy that is plagued by both the lack of consumer and business confidence, and a credit liquidity squeeze, where banks are not only not lending, but actually aggressively withdrawing liquidity from the business world.

Nothing the Fed has done, has managed to change this credit squeeze. As mentioned in my previous blog, the only way for the Fed to improve the credit squeeze situation is to go direct into the business world through new entities (or takeover existing entities), and not merely put tons of cash into the hands of the bankers.

If a person like me, sitting in the quiet of my room can make this statement, Mr. Bernanke, and Mr. Hank Paulson, with all their top, Ivy League, super intelligent people advising them must surely know this potential solution. Thus, we can infer that their policies and actions are not to improve credit squeeze situation, as claimed, but to save the banks.

Putting money with banks that have lost the money being injected does not give the banks any additional funds to lend money. Let's read that again.

Let's say a bank had US$100 billion to lend, and have already used up the US$100 billion by lending it out. With this US$100 billion loan to customers of poor creditworthiness, the bank has lost US$50 billion, since it now knows the customers can't pay.

Even if the US Government puts in US$50 billion into this bank, it has merely put the bank back to Square 1, i.e. in the same position where all its money has been loaned out. Thus, where does the bank find extra money to lend?

Again, I am very sure the US Government officials know this. So, it is very clear that the US Government is very intent on bailing out and saving the banks, which benefits the shareholders of the banks, but no one else, at the expense of US taxpayers.

Is there absolutely no valid reason to save the banks? Is there no benefit to the taxpayers at all?

There is one indirect argument for the bailing out of the banks. In the 1929 to 1939 Great Depression era, the US Government adopted a hardline, no intervention policy. Through this policy, 10,000 banks collapsed, mostly by 1933. The hardship of the US people is felt through the loss of their entire lifesavings through no fault of theirs, except in trusting the banks that they put their money with. Thus, my earlier blog, "Is Your Money Safer Under the Mattress?"

Thus, a completely hardline approach of "No Government Intervention" has proven to have aggravated an already fragile economic condition, during the Great Depression era. Nevertheless, the current approach to try to "Save All Banks" seem to err on the opposite extreme!

The US Government can't possibly save all banks and other financial institutions. This is a gross abuse of taxpayers' money, and at best, is a negligent misuse of public funds. Why? Because putting taxpayers' money to cover for bank losses, where the money is already gone, generates no Return on Investment. If this idea was a good one, Warren Buffett and George Soros would be so busy announcing the many banks that they are buying right now.

There might be a need to save some of the "profitable" banks, i.e. banks with a profitable business model that need money to tide over the current critical economic situation. There is no point saving banks that are going to cost the taxpayers a lot of money, for practically no returns on investment.

However, the US Government has been throwing money like a drunkard on a wild party of his life, just before he goes to jail. The world has been watching this action with a worried look on its face.

On the one hand, who would wish for banks to fail? The pain and domino effect consequences are most unpleasant. On the other hand, the action of splashing money like there is no tomorrow, is bound to have some serious consequences down the road! If not, every government in the world would be doing it.

BUT, no other government in the world is able to do what the Fed has done thus far. In our previous blog entitled "Will World Interest Rates Rise in the Next One Year?", we highlight that there is a limit to what even the German Government can do.

Worse, the most significant worry is the potential unintended consequence of Hyper Inflation. My blog has been peppered with numerous articles and video clips that discussed this concern. One example on my blog would be the "Bloomberg Interview of Peter Schiff on 28 October 2008".

Printing Money not backed by Gold tend to give rise to a High Inflationary Environment in the longer term. Exactly how much money printed is excessive depends on the world's reaction to the printing of money.

In this regard, all I can say is that the US Government has been really pushing their luck, very, very far, in the last few months. The world has been accepting the various announcements, US$700 billion for TARP, US$300 billion for Citigroup backstop, US$200 billion for Freddy Mac & Fannie Mae, US$150 billion for AIG, just to name a few.

What is the Unintended Consequence of Excessive Printing of Money? The answer, "A Severe Currency Devaluation Crisis leading to High Inflationary Environment."

The current economic situation in the US is one of "THE GREAT RECESSION", i.e. this recession is so deep and painful, that it is like no other ever experienced in the last 100 years, except for the Great Depression.

The question of this current fragile economic situation turning for the worse, into an Economic Depression is plausible, and in fact, the probability is growing with each US Government intervention.

Why? In my opinion, an Economic Depression can only come about due to one of two reasons, i.e.
  • Trade Protectionism, leading to a phenomenon of Protectionism throughout the world, or
  • A severe US Dollar Currency Devaluation Crisis.
The biggest concern in my mind has been a US Dollar Devaluation Crisis, and thus, for quite some time now, it has been quite puzzling to note the strength of the US Dollar, especially in light of the printing of money phenomenon, by the hundreds of billions of dollars every month.

I have been wondering, "What event will "break the camel's back"? Now, I have the answer. By bringing down the Fed Funds Rate to 0% or even 0.25%, Mr. Bernanke has triggered the one of two events that can plunge the existing Great Recession into an Economic Depression, i.e. the devaluation of the US Dollar.

Whether the US Economy will really go into a Depression, will depend now on how much and how fast, the US Dollar devalues against the world's major currencies.

Now that this new wave has started, stemming the tide will be very difficult. Even if the Fed increases its Interest Rate tomorrow, the Bears shorting the US Dollar will not stop shorting. Why? Because there is a long way for the Fed Funds Interest Rate to climb. If it took the cutting of practically all the Interest Rate to strengthen the US Dollar to the current maximum strength, it will probably take a very high Fed Funds Rate to stop the weakening of the US Dollar.

Thus, the statements of my earlier article, "Will World Interest Rates Rise within the next one year?" is being acted out with each passing day.

By triggering the US Dollar Devaluation with a 0% Fed Funds Rate, I am of the opinion that history will record this Federal Reserve move as its biggest blunder in a series of blunders by the US Government in trying to solve the economic turmoil.

There is not much benefit to be gained by a country that relies heavily on imports for its goods consumption, to devalue its currency. If a country's economy is heavily dependent on exports like China, it makes good sense to devalue its currency to improve the price competitiveness of its products. But then again, history has shown that there has never been a country that has devalued its currency to success and prosperity. So, maybe, the economics textbook theory needs rethinking?

Worse, if a country is heavily dependent on imports, a currency devaluation would mean that consumers have to pay more for the same goods today than yesterday. For a country like the US, where there is no choice but to buy the imported goods because the country's economy has changed structure into a service economy over the last half of the century, there is no real benefit to be derived from devaluing the US Dollar.

The US public and Government will experience the pain of a devalued Dollar within the next few months. Inflationary pressures due to the devalued Dollar will cause new problems for the US Government. What benefit is there to be derived by triggering such an event?

In my opinion, there is no benefit to be derived from a 0% Fed Funds Rate, and in fact, there is no way, the Federal Reserve can sustain this policy for more than a year, as it needs to raise funds to cover its balooning Government Budget Deficit Spending, as well as its Balance of Payments Deficits.

I would conclude with a few fundamental observations as a result of this latest US Government Policy: -
  • US Dollar is now weakening at a rapid pace to other world currencies. This trend is likely to continue for a while, albeit occasional corrections due to intervention attempts by central banks of the world.
  • The Bonds Market Bubble will burst in the next one year. As is, the interest rate gap differential between the extremely artificial Fed Funds Rate at 0% and the high Business Loans Rate does not reflect the true credit squeeze situation. The Fed will be eventually rendered powerless to control its interest rate, having played with fire for far too long.
  • Gold & Oil Prices will rise as part of the Flight to Safety Phenomenon, as the probability and risk of the occurence of the Hypothesis of Hyper Inflation increases. However, I am still skeptical about the potency of Gold Market to sustain its price rise over the longer term. It is possible that Oil has hit its market bottom, at least in the foreseeable future, pending new information of a significant nature.
  • US Stock Market will not do well in a deep economic recession aggravated by high inflationary pressures due to a weak US Dollar. The World Stock Markets are highly correlated, and will follow the leadership of the US Stock Markets lower and lower with the passage of time.
  • Other Commodities Markets will continue to remain weak, at least in the foreseeable future, mainly because the economy remains deep in recession, and thus, demand continues to weaken, in an Asset Deflationary Environment.
In conclusion, subject to new information that significantly change the current market and economic structure, I am of the opinion that the US and World Economy has turned a corner; a negative corner at that, for the worse, i.e. the devaluation of the US Dollar against the world's major currencies.

This increases the risk and probability of an Economic Depression for the US and the world. It is too early to tell whether this concern will happen. However, in my opinion, the US Government could have reduced such a risk by being less zealous in trying to solve the economic turmoil with a blunt economic management tool that has proven not to work thus far.

You can fool some people some of the time, but you cannot fool everyone all the time. This is one time when the world has woken up. Now, we are in the Economic Phase of Unintended Consequences.

Best wishes,

Ooi
© Copyright of Praesciens.Blogspot.Com, 2008

Friday, December 12, 2008

America's Future Financial Troubles to Year 2030

Dear Friends,

You don't want to miss this video clip from MSNBC.Com. There is a great discussion on America's financial troubles ahead, the Strategic Big Picture, if you will, that needs to be taken into account.

The issues here will affect American lives, and possibly the lives of people around the world. America has a US$50 + trillion financial hole, and the US Government has no plan to solve the country's financial problem. Worst, it is spending even more today, despite the problems looming over their heads tomorrow.

We have had about 20 years of Long Term Economic Boom. With these issues, will there be a Long Term Economic Bust for the next 20 years?

Ridiculous as it may sound, please note that the discussion is with David Walker, the Former Comptroller General of US, and not some guy looking for some personal publicity.

Best wishes,

Ooi

If You Think China's Economy is OK, Watch this Video!

Dear Friends,

There was a time, not so long ago, when the argument of fund managers and market analysts were that China would be the key driver in the world economy should America catch a cold.

Here is a video clip from MSNBC.Com that should change your perspective. I noticed that the reaction in China is so much different from another video clip I saw, where a few hundred workers lost their jobs overnight without compensation, and went on a peaceful protest.

The issue is not whether China workers are emotionally more reactive than US workers, but rather,

"Will workers around the world, who lose their jobs in the next two years, become aggressive and violent out of financial desperation?"

It is easy to argue that certain people are more aggressive and reactive than others. However, who understands the pain and desperation these people are going through? Who are we to judge them, unless we have experienced what they are experiencing?

Best wishes,

Ooi

American Public Doesn't Want a Bailout

Dear Friends,

This video clip from MSNBC.Com reports on the Wall Street Journal Poll as to whether Americans are for or against bailouts.

46% approve a car industry bailout while 42 % disapprove. As to Financial Bailouts, only 27% approve while 50% disapprove.

We can expect growing pressure from the public, as they get more and more angry, frustrated and desperate about the economic crisis, and rapidly growing unemployment problem, will the US Government reverse its strategic course of action, and stop future bailouts?

I think it is quite clear that this current "Santa Claus" trend can't continue. There needs to be a Return on Investment (ROI) accountability, to justify spending US$300 billion on a single corporation, and I don't think there is any good financial justification for doing so.

Best wishes,

Ooi

What Happened to Freddy & Fannie? Why?

Dear Friends,

The Witch Hunt continues! The failures of Freddy Mac and Fannie Mae, the two largest financial institutions owning about 40% if the total housing mortgages in US is under investigation.

Check out MSNBC.Com's video clip of the Freddy Mac & Fannie Mae Congressional Hearing.

Best wishes,

Ooi

California to be Completely Out of Money by February 2009

Dear Friends,

Check out this video clip of Jane Wells of CNBC Business News from MSNBC.Com. California's Governor, Arnold Schwarzeneger has announced that California is nearing "Financial Armageddon" and will be completely out of money by February 2009. He explained that California loses nearly US$500 a minute, or US$400 million a day.

What I can't understand is why the Federal Government is busy with corporate America, and yet, does not help its states?

Best wishes,

Ooi

Money is Safer Under the Mattress?

Dear Friends,

Thanks to MSNBC.Com, we can view CNBC's Trish Regan's report on Investors need for financial security, and thus, "pouring money into T-Bills" or Treasury Securities (US Government Bonds), even at 0% interest rate.

This is as good as putting "Money under the Mattress" because there is no return on investment. Of course, in this case, investors think that money in the hands of the US Government is safer than the mattress!

What is interesting, and somewhat disturbing is that even after a US$300 billion backstop, and hundreds of billions of dollars poured by Treasury Secretary Hank Paulson into the financial institutions, investors, presumably categorized as "sophisticated investors", i.e. those with investible assets (excluding domicile property) of over US$2 million, are thinking that it is better not to earn interest than to earn 2% with Citigroup, or JP Morgan or Bank of America.

Is there something these people know that we don't? Or is it mere Extreme Fear"? If the rich is so fearful, are you?

Best wishes,

Ooi

Not All Banks Are Bad

Dear Friends,

Thanks to MSNBC.Com, we have this interesting video clip entitled "The Little Bank that Could" as reported by CNBC's Erin Burnett. It is about a commercial bank named Capital Federal Savings that exercised financial discipline, and had the wisdom to stay away from Sub-Prime, CDOs, and other tempting but risky way of doing business.

I know there's a lot of anger out there thrown at financial institutions and people who work in financial services sector, but we need to put things into perspective; not all banks are bad, and not all people who work in the financial services sector caused the banking crisis.

Th3ere are good people who go to work everyday, just like everyone else, except that they work in a financial institution, who are also facing the risk of losing their jobs today.

Unfortunately, if the world subscribes to "free market capitalism", it will enjoy economic booms and endure economic busts. Such is the way the world works in capitalist society. It is not perfect; but is there a better alternative?

Best wishes,

Ooi

Thursday, December 11, 2008

Will World Interest Rates Rise within the next one year?

Dear Friends,

Will World Interest Rates rise within the next one year? I believe so. Why?

Please click on the website link to read the article from UK Financial Times entitled "German Bond Sales Struggles to Hit Target" written on 10 December 2008 by David Oakley.

I quote the most important paragraphs: -

Meyrick Chapman, a fixed income strategist at UBS, said: “When a German bond auction struggles, you know there are problems.

“This is a sign that demand among investors is already waning for government bonds because of the huge supply.”

Other analysts noted the yield was 2.2 per cent, about 4.5 basis points less than existing comparable bonds, which suggests the market is still in reasonable shape because of low interest rates and deflation fears.

Most of the while, Governments are able to manage the money market interest rate. For example, the Federal Reserve had brought its FOMC Interest Rate down to 1% from a high of 5.5% within a period of one year.

However, questions have been circulating in my mind as to whether any Government, including the US Government, can bring down its FOMC Interest Rate to such a low level, and yet, continue to print money, i.e. in the form of issuance of Government Bonds / Treasury Securities.

The German Government's experience as reported in the UK FT article shows that there is a limit to what a Government can do. And I think that the US Government is no exception to the law of the universe, especially in the longer term.

In my opinion, the US Government will have to raise the FOMC interest rate within the next one year, not because it wants to, but out of necessity, if it wants to continue to attract foreign investors from China and Japan, and even the European Union, to its Treasury Securities / Government Bonds.

The issuance of these so called T-Bills are necessary to fund the huge Government Deficits, which are speculated to rise from close to US$450 billion to US$ 1 trillion or more this year, depending on the accounting treatment that the US Government adopts in disclosing its bailout spending.

Once this new trend in interest rate starts, the next important question will be "How High can it go?"

If we learn from the experience of the 1970s Economic Recession experience, which has similarities to the current economic situation, the FOMC Interest Rate shot up to around 7% p.a.. In the early 1980s, the Fed Funds Rate went above 8% p.a.

It should be noted that Oil Price rose from around US$18 per barrel in early 1973 and peaked at US$104.06 (December 2007 term) in December 1979. When it was clear that this high inflationary environment would create an economic recession, the Governments in US and Europe lowered the Central Bank Interest Rates in order to spur the economy.

Sounds familiar? I am talking about the 1970s, and yet, the description fits what is happening today.

What happened subsequently was that eventually, a Hyper-Inflation / Stagflation environment arose, and the Governments of the world had no choice but to increase their Central Banks Interest Rate to 7% p.a.; some even much higher.

What does a Fed Funds Rate of 7% mean? It means that Fixed Deposit Rate will be at least 8% p.a. and the Base / Prime Lending Rate will be at 11% to 12% p.a. This also means that the borrowing rate for corporate loans will rise to 14% to 16% p.a. as there is usually a spread of 3% to 5% which the banks charge, on top of the Base / Prime Lending Rate. There have been situations where banks charge as high as 18% to 22 % in borrowing rate, due to the liquidity squeeze environment.

For people with cash, this is a very happy time. For people who borrow money, this will be one of the toughest times, if not THE toughest time.

In my opinion, the risks of a hike in Central Banks Interest Rate is increasing rapidly, especially so, when we are 1% to 2% from the bottoming of the Central Banks Rate today.

Best wishes,

Ooi

Wednesday, December 10, 2008

The 3 Strategies for Investment / Trading Success

Dear Friends,

This article from the Wall Street Journal entitled The Stock Picker's Defeat provides us with one of the most valuable lessons that we should learn on Stock Picking. It also records the rise and fall of Bill Miller of Legg Mason, one of the most successful fund managers on Wall Street. Please click on the link to read the article.

I quote from the WSJ article: -

"The thing I didn't do, from Day One, was properly assess the severity of the liquidity crisis… Every decision to buy anything has been wrong." Bill Miller, manager, Value Trust

To this statement, may I add that there are three very important strategies that affect your Investment / Trading Profitability: -

First, the overall Strategic Economic Cycle affects the Primary Wave Trend Direction, i.e. if the economy is in recession, then the Big Wave, i.e. the Primary Wave will be a Downtrend, which means that with the passage of time, price will be lower than it is today.

This is what we are experiencing today, i.e. lower and lower prices. Contrary to the Pure Fundamental Analysis Investor (Fundamentalist), this approach is called the Global Macro Strategy, and it is the strategy adopted by George Soros. Contrary to popular beliefs, George Soros is first and foremost a Fundamentalist, but at Strategic Economic Cycle level, rather than Stock Investing Level.

I can tell you one thing - NEVER Argue with the Strategic Economic Cycle, i.e. don't buy a stock in a Primary Downtrend. I make one exception, i.e. when the market has crashed by more than 30%, in a Climb Back to Health Scenario. Even then, I would only consider the possibility, rather than to rush in.

This is probably the first strategy missing from most investment / trading system, and this is THE SYSTEM that was omitted by Bill Miller, causing his downfall.

The Second Strategy is the Market Sentiment, monitored in the form of Technical Analysis. Yes, even in Downtrend Economic Cycles, markets go up. However, the market tend to go down 100% and go up between 30 % to 67%, and then go down another 100% in a Primary Downtrend.

If you can't see the charts and the key waves, you will be confused because the market goes up and down. Market Sentiment allows you to win even when you buy in a Primary DownTrend, but when you win, you will a little, while when you lose, you lose a lot.

This is in contradiction with the Rules of a Master Speculator, as explained by Victor Sperandeo. in his book, Methods of a Wall Street Master. We should trade in the direction of the Primary Trend, so that we win more than we lose in terms of Reward / Risk Ratio.

Also, when economy is bad, good news doesn't move the market up by a lot, but bad news move it down quickly and by a significant amount. The only time when the market shrugs off bad news in a Primary Downtrend is when it is having one of its bullish sentiment bouts, and this is seen in the form of a Correction Wave. This wave lasts between 3 weeks to 3 months, and I think we are about to see such a Wave in the Dow.

Even if Bill Miller had ignored the Strategic Economic Cycle / Global Macro Strategic Outlook, he would have been saved if he had understood Technical Analysis. Most Fundamentalists tend to look at Technical Analysis as hocus pocus rather than a science, but as the saying goes, "Ignore what you don't know at your peril."

The third strategy, i.e. Fundamental Analysis, is the most popular and most believed in Investment Strategy. Fundamental Analysis is important only in telling you WHAT to buy, never when to buy. Only Technical Analysis and Strategic Economic Cycles can tell you WHEN. In other words, Fundamentalists for Stock Investing have INCOMPLETE ARSENAL of INVESTMENT TOOLS to make good decisions.

I really believe you need all three strategies. Imagine a Carpenter who only has a Hammer. I don't think he will make very good tables. However, another carpenter with screwdrivers, hammer, bolts and nuts, is likely to make a better table, provided he knows when to use what under which condition. To say that the Hammer is more important than the screwdriver is wrong. It depends on whether you are assembling the furniture parts with screws, or banging a nail into the furniture.

However, let's face it. If you buy at the right time, even if it is a rubbish stock that you know nothing about, you will make money. On the other hand, you may buy the best stock in the market, but if the overall market and economy is bad, even the good fundamental stock will go down. So, if we have to choose between knowing WHAT to buy vs WHEN to buy, WHEN is more important.

Of course, if you have both, you should outperform those with only one of the two skills in the longer term. Makes sense?

It's really up to you. It's your money, and you have every right to employ it any which way you like. Whether you make money or not, you will be the one that will have to live with the consequences of your decision.

I have been involved in the stock market industry for almost 20 years now, and have seen a number of market crashes, and various investment theories. I have also spent the last 1.5 years researching the various secrets of success of billionaire traders. I am merely sharing what I believe is the secret formula to success.

Best wishes,

Ooi

Tuesday, December 9, 2008

MSNBC: How Much Debt Should You Have?

Dear Friends,

A little late to be teaching consumers how to manage their personal and family finances, but I guess, the old adage still holds true, "Better late than never."

This video clip from MSNBC.Com gives a quick 5.5 minute guide to how you should do it.

Best wishes,

Ooi

The Need to Focus on Job Creation

Dear Friends,

There was a time when the banks were virtually everywhere, asking people to take credit cards. Today, the same banks are cutting down on their customers, and credit limits, while raising interest rates if you have a balance outstanding.

View the video clip from MSNBC.Com for a summary of the current credit card situation. Whatever the politicians are doing to pour billions of dollars to ensure that credit is being given is not working. The US Government should work on helping consumers directly, rather than through banks, because its current bailout actions are just a waste of taxpayer's money with no real economic benefit.

I'm not saying that all banks and other industries should not be bailed out. However, there is a difference between brain dead charity and a viable and profitable business model. Where there is a viable and profitable business model, the US Government has to get a Committee of Shrewd Business People like Warren Buffett, etc., to sit on such a committee to review the deal before the Government commits public funds to a loss cause. Getting a team of politicians to listen to bailout proposals is a waste of time.

People are upset, and I myself felt irritated after watching a video clip that showed that children of less than 8 years old are writing to Santa Claus this time, not to ask for a toy but to help their parents through these tough times. This is very, very sad, and tears well up in my eyes as I write this.

As the events of the economic turmoil and banking crisis unfolds, I am beginning to see the wisdom in President Hoover's policy not to bailout the banks during the era of the Great Depression.

The US Government has to "take the bull by its horns" and focus on the Return on Investment in the form of job creation with every taxpayers' dollar spent, from now on.

Yes, this will take time, but it is THE ONLY REAL SOLUTION to the economic situation. There will be pain for many while waiting for this Job Creation Policy to achieve full impact, but it is better than throwing money into the drains.

Best wishes,

Ooi

MSNBC: Layoff Survival Guide

Dear Friends,

Here is a useful video clip from MSNBC entitled Layoff Survival Guide, just in case the unfortunate event happens.

Best wishes,

Ooi

US Commercial Real Estate - Next to Get Hit?

Dear Friends,

A good summary of the Real Estate Situation in the US from Wall Street Journal's Alex Frangos. Is the US Commercial Real Estate Industry the next to get hit by the economic downturn?

Best wishes,

Ooi

WSJ - How Long Will This Recession Last?

Dear Friends,

The stock markets are now in a Correction Uptrend Phase. However, the US Economy is still very much in recession, and in fact, will probably get a lot worse before it gets better.

Here is a good discussion from Wall Street Journal.Com between Stacey Delo of Market Watch and Liz Ann Saunders, Chief Investment Strategist of Charles Schwab.

Best wishes,

Ooi

Saturday, December 6, 2008

Jim Rogers on the Need to Let the Banks Fail

Dear Friends,

A very emotional but interesting discussion between Commodities King Jim Rogers and CNBC's Bill Griffith & Michel Cabrera Caruso on Power Lunch 26/11/08. Jim Rogers has covered his Short Positions in November 2008.

Questions discussed: -
  • Shouldn't we bail out the banks?
  • Shouldn't Rogers have sold his China investments?
  • What is the Dollar's direction?
  • Should we buy stocks or commodities?
  • What is the Rogers' view of President Obama's policies?
  • What US stocks would Jim Rogers buy?

Best wishes,

Ooi

Roubini on Economy (28/11/08)

Dear Friends,

Professor Nouriel Roubini's latest discussion (28th November 2008) on the economy with Bloomberg news. Now, Dr. Doom, as he is called, due to his Pessimistic Outlook, says that it is not merely a US Economic Recession, but one of the worst Global Recession in decades that is about to hit us.

Amongst questions discussed: -
  • Should the Government bailout the Financial Sector?
  • How long will this Economic Recession last?
  • Will Interest Rates go to Zero?
  • What is the Roubini's Opinion of Jim Rogers' view of US$ Devaluation?
  • What is the Roubini View of Commodities?
  • Where would Roubini put his money?
Best wishes,

Ooi

Part 1


Part 2

Unemployment Rate at 6.7% and Still Rising Rapidly

Dear Friends,

This video clip from Reuters Video, released on 5th December 2008 states that Unemployment Rate in US have climbed to 6.7%. 533,000 jobs were lost just in November 2008 month alone. This is the most amount of jobs lost in one month since 1974. Total jobs lost in the last 11 months is now close to 2 million. And this is just the beginning of an avalanche of job losses to come.

Not good news at all, but it is necessary to record history as it unfolds. Meantime, hang in there, buddies! If any of you guys are feeling a little down, remember, soothing music can be great medicine. Go to Youtube, and play the Oldies, or play something from Leona Lewis and Rihanna. Whatever the case, be happy!

Best wishes,

Ooi

Something to Sooth the Nerves - Mr.Sandman is at hand!

Dear Friends,

This song entitled Mr. Sandman, sung by The Chordettes, seem a great way to start a Saturday morning, especially after the Dow had risen to 8,635.42 to yield a positive 259.18 points up, from more than 270 points down during the Intra-Day session.

To all of you Eternal Bulls, I dedicate this song; a few minutes reprieve from the shell shocked days you have been experiencing in the last two months.

Best wishes,

Ooi

Singapore may face Years of Slow Growth

Dear Friends,

I would refer you to the article by Neil Chatterjee and Kevin Lim entitled "Singapore may face years of slow growth after recession", published by Reuters on 6th December 2008.

I quote from the article as follows: -

"Singapore must be prepared for several years of slow growth," he said. "Even the most pessismistic bears did not anticipate the consequences of the bubbles," Lee added, referring to U.S. subprime housing woes and global trade imbalances.

This time, the economic downturn is not the same as any other that we have experienced in our lifetime, UNLESS you are a Centenarian (100 years or older) or close to one.

Best wishes,

Ooi

Friday, December 5, 2008

Krugman on Possibility of Depression & Potential Solutions

Dear Friends,

This video clip from MSNBC provides a great discussion from Paul Krugman, Nobel Prize Winner in Economics, on whether the US will be experiencing a Depression, and what solutions are possible.

This video also provides some interesting facts about the previous Great Depression during the 10 year period from 1929 to 1939.

Best wishes,

Ooi

Paul Krugman on US Economy

Dear Friends,

Check out this MSNBC video clip of comments by Paul Krugman, one of the most eminent economists in US. If I am not wrong, Dr. Krugman is a Nobel Prize Winner in Economics.

I find his comment on his reaction when he saw the ISM data to be amusing, and disconcerting, in terms of where the US economy is heading.

Best wishes,

Ooi


US in Economic Recession since December 2007! It's Now Official!

Dear Friends,

Check out the video clip with good discussion by the CNBC team on the NBER declaration of economic recession.

US was officially in economic recession since December 2007, according to NBER (National Bureau of Economic Research), the official body defining a recession, from a different perspective, compared to the layman definition of two quarters of negative GDP Growth.

Best wishes,

Ooi

US Unemployment is at 26 Year High!

Dear Friends,

Check out this video from MSNBC with CNBC's Margot Brennan reporting that US Unemployment is at 26 year high, and yet, the retrenchment is just starting.

We are definitely nowhere near the trough of the economic recession. In fact, the worst is yet to come as consumers brace for a major withdrawals of consumer credit by banks. This will in turn affect consumer spending, which will affect corporate profits, which will affect Unemployment further, in a vicious circle of downward spiral.

Best wishes,

Ooi

Monday, December 1, 2008

Obama's Economic Team & Potential Solution

Dear Friends,

A very good discussion on the Obama's Economic Team and the available options from MSNBC.Com. US Government Debt has increased by US$1.5 trillion in the last few months, and still rising rapidly.

With the "best" brainpower available; with only one strategic solution, i.e. the Keynesian Theory, and thus, a "no choice" situation, can Obama deliver the "Reality" from "Hope"?

Let's hope so.

Best wishes,

Ooi Hun Pin

US Housing Situation Worsening

Dear Friends,

It would seem, based on this NBC Interview of CNBC's Erin Burnett, that the Housing Situation is worsening, and housing prices broke down further.

Best wishes,

Ooi Hun Pin

Citigroup Historical Event

Dear Friends,

This is old news, but I want to record this historical event on my blog, after my long absence, based on the news as reported by NBC News on MSNBC.Com, and CNBC Interview of Charlie Gasparino, etc.

Best wishes,

Ooi Hun Pin



Friday, November 21, 2008

Key Challenges Plaguing Today's US Stock Market

Dear Friends,

Most people have a good way of handling bad news; ignore them, or better still, don't even want to know about them. However, in management, it has been said that "It is not a matter of how fast you get the good news, but the bad news that reflects the quality of the management."

Ignorance is bliss, but only for the short term. What we don't know may hurt us badly. Thus, I always adopt the attitude that I don't have a problem sleeping at night, if I know what is the worst thing that can happen. On the other hand, I DO have a problem sleeping at night, if I DON'T KNOW what is the worst thing that can happen.

I also adopt the attitude that good news / events are easy to manage, and thus, do not need much thought in advance. There is a lot more time to respond to good news because the decisions tend to be made easily.

Thus, this blog is skewed (biased) towards analyzing bad news, potential and real. Most bad news and potential problems will never turn into the worst case scenario, but sometimes, it is not a question of quantity, but of the significance in impact should merely a single less probable event hit us with full force. Not to be prepared is pure laziness, which I cannot accept as a philosophy of life.

In my mind, the biggest challenges plaguing the US Stock Market today (Short Term of less than 6 months) is the fear that
  • Commercial Mortgage Backed Securities (CMBS) may be in the process of doubling on their defaults in year 2009. Click on the website link to check out MarketWatch Article by Laura Mandaro dated 19 November 2008 , AND
  • The Consequences of further Corporate Debt Default from the Auto Industry if it were allowed to FAIL.
If General Motors is bleeding losses / burning cash at the rate of US$1 billion to US$2 billion a month, what is the total amount owed by the Auto Industry, i.e. not only GM, Ford and Chrysler, but also the businesses of dealerships, spare parts manufacturing, etc.?

Also, can you imagine 2 to 3 million people out of work and further aggravating the already badly hit housing market with new houses for sale?

There is also an argument by Paul B. Farrell, also of Market Watch, of a coming Great Depression 2, in his article dated 19 November 2008, entitled We'll be in Great Depression 2 by 2011. Farrell provides 30 reasons why he is of such a gloomy opinion. Please click on the website link to read the article.

Farrell mentions US$2 trillion of loans which he claims the Federal Reserve has refused to disclose (how did he know then?), which he calls the Shadow Banking System.

I don't know how far this claim is true, but if it is true that the Fed can loan out US$2 trillion without disclosure, I think this will be the ultimate breach of confidence in the US Banking System.

It would raise important issues like, "How can the Fed loan out such a material amount without Congress approval?" and "If such a big, material issue is covered up, what other cover ups are there?"

However, I would like to emphasize that I don't know and I can't verify Farrell's claim. It is important for us to take note of issues that may arise, but sometimes we have to make our own decisions, rightfully or wrongfully, whether to accept the explanations, claims and assumptions of others.

One of my biggest concern in the medium term (6 months to a year) is the financial health of Freddy Mac and Fanny Mae. Already the two US Government owned mortgage firms have asked for US$200 billion in bailouts. If this is enough, and the bailout money requirement stops here, that's fine. BUT, I fear (without any real evidence, and thus, just an intuitive fear), that US$200 billion is not enough to cover losses arising from around US$5 trillion of mortgage loans.

If we take a default rate of 10%, the total bailout money required may eventually hit US$500 billion.

Of course, one of my biggest concern over the longer term (1 to 2 years) is the effect of various defaults, from housing to commerical properties, to corporate loan defaults, to banking collapses, on the Credit Default Swaps Market and its players, of which the top banks of America are very much exposed to.

And as you would have guessed from my numerous blogs on Hyper Inflation and the consequences of Excessive Printing of Money, that I am extremely concerned with a potential US$ Devaluation Crisis.

In year 2006, I conducted a detailed Scenario Planning Study of the Future of the US for the timeframe of 10 years, i.e. up to 2015. I concluded then that at best, the US Economy would chug along in a lethargic manner, but the possibility of a Depression exist.

However, I also concluded then that only four Key Driving Forces would be strong enough to push the US Economy into such a devastated state.

First, there must be a bursting of an asset bubble. This has happened in the form of the Sub-Prime, Near Prime, and now, Prime Housing Mortgage Default Crisis.

Second, the US Dollar has to devalue significantly. This scenario has happened for a while until the last few months when it unexpectedly strengthened significantly, erasing a large portion of its devaluation.

However, as the saying goes, the story does not end till the fat lady sings. Will the US Dollar experience a devaluation crisis in the future? Some people like Peter Schiff and Jim Rogers think so. Their opinions have been recorded on my blogs.

If there is a US Dollar Devaluation Crisis, due to the excessive printing of money, then, this will eventually trigger an International "Lack of Confidence" Crisis, and there will be no foreign investors' money to fund the irreversible Balance of Payments Deficits, and thus, the economic situation will worsen considerably for America.

This will lead to further Asset Deflation, which is a nice way of saying even more crashes in asset prices like properties and stocks, and even business ownerships, due to foreign investors pulling out their investments in US.

This should do it, i.e. push America into a Depression. BUT, if it doesn't, then the Trade Protectionist Policies that will be pushed for adoption by some Congressmen, to win popular votes, in an effort to protect jobs, will push THE WORLD, into a Depression.

This was THE WORST CASE SCENARIO that I foresaw in year 2006, before all the crisis happened. There is no reason to change any of my earlier analysis / scenarios.

This is why I have been monitoring the situation very closely, and emphasizing what seems like the words of "Doomsday" sayers, on my blog. Our job is to take all kinds of data into account, and then, only then, sift through each one of them with a fine toothcomb, to separate the fairy tales that cannot arise from the plausible situations that can arise, however, improbable.

With that, we will be in a much better position (better prepared) to take advantage of any opportunities that may arise that conforms to our strategic foresight and scenario planning.

Please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

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