Market Insight

Window Dressing for the Markets

Negative yield on any kind of financial instrument happens only when SAFETY is the key motive. In the old days, if you were a wealthy person, you would pay a banker or a goldsmith to keep your gold in a safe deposit. Just as today I would pay my bank to provide me with a safe deposit where I can keep my wife's diamonds.

Essentially what this shows is that some investors were so fearful of the market(s) that they did not know where to park their short term liquidity and chose to dump it all in US T-Bills. This is perhaps a reflection of the massive amount of liquidity in the system and lots of cash lying on the side. Another possibility is that investors are taking their money out of equities ahead of Thanmksgiving and had to park the funds somewhere and found US T-Bills to be that safe haven.

However, it still does not make sense to park every thing in US T-Bills when the US Dollar is declining and the carry trades currency of borrowing is now the US$ instead of the Yen. It would have been better to buy Australian Dllar T-Bills instead of US Dollar T-Bills in today's environment. Afterall, any further rally in gold, will only benefit the Aussie Dollar.

The Shallowest Generation

Superb article. You have hit the nail right on the head.
I take my hat off to you James.

No country or society can sustain economic prosperity and growth by borrowing money to finance consumption.

Unfortunately, this problem has now spread to RUSSIA, INDIA and many other countries also. The current generation in many cities around the world want air conditioned schools, air conditioned school buses, cell phones, designer clothes and expensive sneakers not to mention the iPhone, the iPod and other gizmos.

Today children play video games rather than real sports, cannot go to school unless provided with an iPod just because everyone else has one and are simply growing up pretty spoilt.

You have to earn your money through hard work and learn to save it and invest it wisely. However, as you have said that the CEOs and Congress have made a mockery of hard working Americans who lived by the right thoughts, right standards and rules of the previous generation which fought two world wars and survived the Great Depression.

This article is a wake up call. Every reader needs to send this to his/her Congressman.

Paulson's Plan: Stop the Rot

Dave, you are an idiot if you think Henry Paulson is trying to help Joe Blog or the American American.

I have worked on Wall Street for 21 years and know CDOs like the back of my hand. However, I have the integrity to stand up and say that Wall Street is screwing America and this bail out will lead to serious inflation and take our country down in a big big way.

An Absence of Leadership

A significant and immediate tax credit for financial institutions to purchase homes would be a more effective solution for the financial crisis than the proposed $700 billion federal bailout, says BB&T Chief Executive John Allison.

The federal government should also buy homes, and not securities backed by mortgages, he wrote in a Sept. 23 letter to the U.S. Congress.

“This is a housing value crisis,” Allison wrote. “It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds.”

In his letter, Allison questions how the government will pay the proper price for distressed real estate assets. Overpaying will harm taxpayers, while underpaying will hurt real estate markets. He also believes allowing homeowners to use the bankruptcy to restructure their loans will “force losses on banks.”

He adds the primary beneficiaries of the proposed rescue are The Goldman Sachs Group Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS). The U.S. Treasury, he says, is “totally dominated by Wall Street investment bankers,” and “cannot be relied on to objectively assess all the implications of government policy on all financial intermediaries.”

Allison also said it is “inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.”

He pins the responsibility for the crisis on Freddie Mac and Fannie Mae.

Winston-Salem, N.C.-based BB&T (Branch Banking & Trust Co.) is a $136 billion banking company with 1,500 branches. Although the company (NYSE:BBT) has been hurt by the slowing real estate markets, it continues to turn a profit. It posted second-quarter net income of $428 million, or 78 cents per diluted share. It made $458 million, or 83 cents per share, in the second quarter of 2007.

Allison is scheduled to retire at the end of the year.

Profiting from the $700 Billion Bailout

Good article.
I agree with what Hedge fund operator, Eric D. Hovde has said. Wall stret and the banks responsible for this mess should not be bailed out. Secretary Paulson has some serious conficlt of interest here between bailing out his wall street buddies and the best interest of the tax payers.

The $700 Billion Disconnect: Lost in Translation

I do not know who wrote this article but it offers the most ridiculous set of arguments I have ever seen.

I have worked on Wall Street and with CDOs, credit derivatives and other derivatives as well. The problem that the banks face today is one of their own making. It was not created by tax payers,

Therefore, as Jim Rogers said on Bloomberg "How come these guys have the audacity to spend our tax money on bailing out their friends on wall street so that they can drive their Maseratis"?

I agree with Jim Rogers. There should be NO bail out and in fact those responsible for this mess should be investigated by the FBI and brought to justice.

This is the MOST OUTRAGEOUS article that I have ever seen.

Why Didn't Bernanke, Paulson Plan Better?

Good article. Cannot agree more.

In Defense of the Paulson Plan

This is the most bizarre and preposterous article I have ever seen during this crisis.

Why should the US tax payer buy toxic waste at a premium to book value when it is trading (if at all) at a deep discount to book value.

In free market capitalism, which is what Wall Street is all about, the fittest survive. JP Morgan and Bank of AMerica will survive along with Wells Fago and a few other banks who did not take part in the sub prime party. Why should anyone, especially the US tax payer bail out the banks who could not manage their risk prudently.

By the way, I have worked for Lehman Brothers, Merrill and Citigroup. Lehman had some very smart people working at the firm especially in fixed income. How they got it all wrong only those still working there can tell. However, while I sympathize with those who lost their jobs and saw the value of their equity go to zero, these folks will not be losing their homes. My sympahies therefore rest with those who lost their homes due to foreclosres and predatory lending.

The government should take steps to bring to justice the predatory lenders at the mortgage firms and nstead of bailing out the wall street banks the government should bail out the homeowners who lost the roof over their head.

This bailout plan will NOT work as it has prven to NOT work for a while. Bernanke and Paulson kept saying the worst was behind us but they have been proven to be wrong. These were the men at the helm of affairs when this problem was created and now how can we expect them to solve the problem that was created on their watch. Where is the accountability in our government and in our society.

There is an interesting article on seekingalpha on how the ban on short selling is going to have a very negative impact on the optons markets. Paulson in particular should have known this because he worked at Goldman Sachs. Now mutual funds and other investors who legitimatel want to hedge their exposures to insolvent financial institutions via options will simply not be able to do this.

Changing the rules of the free markets mid-sea is not a solution. I will only make things work. We need to let the bad banks fail and then from those ashes let newer and good ones rise. Most of our banks are run by deadwood. Let the deadwood get cleared for the future of our country and our banking system.

India's Sensex Likely To Trade in 11-13K Range Through 2008

However, the SENSEX is already over 14,000

Bill Gross Wants A PIMCO Bailout

Excellent article. Great research.

Indian Outsourcing Stocks: Beware The Stronger Rupee

It is not just the Rupee appreciation that is going to impact Indian outsourcing firms.

There are other issues too:

1. Rising wages and salaries in India
2. Severe shortage of skilled talent
3. High staff turnover
4. Competition from the other countries notably - Philippines, some parts of Eastern Europe
5. Rising cost of office space
6. Lack of infrastructure - you need to see the mess that Bangalore airport is. Others are no better either.
7. Last but not the least - growing political pressure in the USA especially from a Demorcat controlled congress

Patni Computer Systems: High Growth, Low P/E, Limited Shares

I visited Mumbai, Gurgaon and Bangalore recently (May 2007). Here are a few observations:

1. India is changing dramatically - some for the better, some for the worse.

2. Brand new buildings have come up in these three cities but the traffic is terrible, the airports chaotic - in other words a complete mess.

3. At Bangalore airport you cannot find a decent restroom and that city is supposed to be the Silicon valley.

4. Coming to outsourcing firms, here is the heads up. All major international BPO firms are there in India. In addition major banks and financial institutions like JP Morgan, Lehman, Goldman, Morgan Stanley, Royal Bank of Scotland, Fidelity - have all set up huge offices in India. When I say huge offices, I mean literally whole buildings.

5. Therefore, Indian BPO firms are going to face competition and pressure on margins from many sources: (a). from the international firms like Accenture and IBM (b). from captive BPOs set up by the big firms (c). from rising wage costs - you cannot find decent people in India and if you do they eave soon as they get poached by other firms. Staff turnover is very high and Indian BPO firms cannot compete on salary and wages with top international firms. (d). the rising value of the Indian Rupee is eating away margins. (e). There is nothing special to tie the BPO industry to India. Hence, firms are now setting up shop in the Philippines, in Eastern Europe, even in Pakistan where there is a large untapped pool of labour. The BPO business is nothing but a form of labour cost arbitrage. As the arbitrage goes away, firms will move to other places.

No wonder that Infosys - the best managed Indian IT firm has lowered expectations about future earnings. Now Infosys is known to deliver more and avoid creating earnings hype. Yet the fact is that Indian BPOs and IT firms are under pressure.

Patni's stock price went up dramaticall in recet days from around Rs 500 in late May to as high as Rs 580 in June (an appreciation of 40% in one month !!!!). However, the stock is now back down to Rs 494 as I write.

The reason Patni went up is due to what a fund manager friend of mine called "local market dynamics". What he meant was that there was rift between the various Patni family founders of the firm and some private equity firms were interested in buying out there share. I was told the asking price was Rs 600.

Now it seems that the takeover of Patni has slowed down or perhaps stalled and that is why we are seeing a significant retracement in the firm's stock price. Anyone who has followed Patni on the National Stock Exchange will tell you the ratio of buyers to sellers has been very skewed in favor of sellers. I expect more selling pressure in this stock for the near future unless there is a renewed takeover interest of Patni by P/E firms or if there are excellent reults for 2Q 2007.