More Pains Ahead

Investors, like children in the back seat of a long car trip, keep asking “Are we there yet?” In the case of the investors, the ‘there’ is the bottom of the current down cycle. Unfortunately, the response to the investors is still the same as given to the children: “No, we are not there yet.” With IMF now weighing in on the overall size of the downturn, which it claims will last well into 2009, it would seem that we are still in the middle of the economic maelstrom.

With the recent news of China taking drastic measures to reduce air pollution during the Summer Olympics, there will be an impact on the price of commodities. This is a risk potential since China is a large consumer of commodities. According to Beijing Summer Olympic Committee news, Du Shaozhong, the deputy director of the Beijing Environmental Protection Bureau [BEPA] has outlined more details on the temporary but drastic measures, in and around Beijing, to bring air pollution down to an acceptable level.

List Of Planned Restrictions

Visa (V) and MasterCard (MA) are credit card brands that were started by banks to facilitate transaction payment. Their business model is to simply facilitate and process the credit and debit transactions between the bank of the merchant and the bank of the customer and generate revenue from the service and transaction fees. In other words, they were created to add a layer of convenience to the consumers for the payment of goods and services.

As more convenient forms of using credit cards and debit cards are added, the likelihood of consumers using credit card and debit cards increases. For Visa and MasterCard, this is a good thing because, as more Visa and MasterCard credit card and debit card transactions occur, more fee income they will make – a very simple business model.

The newspapers Friday were all a buzz about Bear Stearn’s (BSC) liquidity crunch and the concerted efforts that the JPMorgan (JPM) and the Fed are taking to provide some immediate relief. The New York Times reports that [bold and italics added for emphasis]:

For the next month, JPMorgan will work with Bear Stearns to reach a solution for its financing crisis. Options could include organizing permanent financing or, according to people briefed on the discussions, buying the bank for a discounted price.

The Wall Street Journal reported today that the U.S. government would release a broad blueprint for preventing a recurrence of the current credit crisis:

“Mr. Paulson told The Wall Street Journal that the recommendations of the President's Working Group on Financial Markets, which he leads, include strengthening state and federal oversight of mortgage lenders and brokers. The group will also recommend implementing what he termed "strong nationwide licensing standards" for mortgage brokers, a move that will probably require legislation.

The Financial Times reported yesterday on the Credit Derivatives Market Turmoil:

Turmoil in the credit derivatives markets is having an increasingly brutal impact on the wider financial system as a vicious cycle of forced selling drives risk premiums on company debt to new highs.

The price of crude oil closed at $105 Thursday, a record new high. As the price of oil continues to climb, people are questioning how high it will continue to rise. Traders are already betting on it reaching $125 by December 2008, as evidenced by the recent options market activity.

While there are groups of economists and financial managers publicly stating that the price of oil is already too high, that may not be the situation.

As the price of a barrel of oil reaches new record high, there are two distinct groups of thought: one group asserting that the price of a barrel of oil will go to $125 by the end of 2008, and the other asserting that the price of a barrel of oil is too high and will go back down to $60 to $80 range.

Given that each groups’ assertions have support among well-respected economists, how can you monetize these disparate data sets?

With the 2008 Presidential election about nine months away, I find myself entertaining the thought similar to an expectant parent: is it a boy or a girl? To help me understand the professional sentiment, I naturally turned to the odds makers. According to Linesmaker.com, the current favorite is Barack Obama at 4 to 7, meaning if Obama is elected President, a $7 bet on him will to win receive $4, or 57% return on a placed bet. John McCain is far behind at 3 to 2 (150% return):

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Another mega-billon loss reported by major corporation[i]. Reuters reports that Sprint Nextel (S) has posted a $29.7 billion in goodwill write-offs that led to the reported $29.5 billion operating loss for 2007. After months of similar news, one sort of becomes inured to the magnitude of the losses. However, this loss is not due to investment in structured products, like the other recently reported losses, but appears to be a symptom of failure to exercise prudent risk management around Sprint’s merger with Nextel.

In looking at their February 28 press release of the 4^th[ii] and their 3Q 2007 financial statement[iii], one can see Sprint Nextel admitting to improper management of their risks. From a risk management perspective, one can see the business risks, based on their financial statements: quarter 2007 financial statement