Alistair Darling’s budget figures dominated the agenda of the week. There is pretty much agreement that he is too optimistic in growth forecasts of 2009, 2010 and 2011 with 3.5 per cent contraction, 1.25 per cent expansion, and 3.5 per cent expansion respectively. IMF forecasts contraction for both 2009 and 2010.
With current government spending plans, Britain needs £175bn in 2009 and another £173bn in 2010. Alistair Darling needs pretty much the same amount of government spending in 2010 unless the government spending causes an increase in household consumption and/or business investment. Considering the extent of unemployment, consumption is not the right candidate. Can the doubled capital allowance or £750m technology investment fund fill the gap through increased investment spending? We can’t tell under current uncertainty.
The challenge is the funding of the government spending. Gilts will be the major mechanism; there is a huge competition to sell government bonds from USA, European countries, Japan. US is planning to issue $2,000bn in the fiscal year from last October onwards, Euro zone governments $1,035bn for this financial year, Japan $449bn, and UK $262bn. Needless to mention the multinational companies selling corporate bonds to the same market segment.
Globally investors have a huge choice and little confidence! They are showing this through higher yields on gilts and higher basis point on credit default swaps. Former being the investors’ premium for higher risk and latter being cost of insuring against default on UK gilt.
If both yields and basis points keep on upward slope, the first risk is that; UK’s AAA credit rating may come under threat, secondly if unable to raise the target funds from gilt sales it may be likely to knock IMF’s door for bailout funds as in 1976. Ratings Agency Moody’s confirmed on Friday, the 24th April that it is not considering UK government’s credit rating for a possible downgrade. It looks like the next two years will be determinant.
Sunday 26 April 2009
Thursday 16 April 2009
NEW COMPETITION TREND: REPAY TARP FUND
This week we saw an interesting request from Goldman Sachs to pay back the $10billion government bail out money received through Troubled Asset Relief Program (TARP). Follower JP Morgan Chase announced it has enough money to pay back $25billion bailout funds. Both announced good profit figures to strengthen their requests.
At a time when government is about to announce the results of stress tests for the top nineteen US banks and conclude whether there is need for further capital injections from $700bn TARP, it is a question mark whether Goldman Sachs & JP Morgan Chase’s timing are good. What might be the motivation behind the new competition trend?
Top Wall Street banks seem to be concerned about being rescued by government funds and restricted in all activities taken including executives’ bonuses, and preference shareholders’ dividends. The possible motivations can be summarized as:
1) Saving the reputation;
2) Getting back the independence of bonus, dividend paying;
3) Attracting clients through the message of “look, I am still the best, paying back the bailout funds first”
4) Diverting public anger.
The stakeholders’ reaction to the new trend is not clear yet:
Markets digested the news positively today as JP Morgan Chase’s share price increased by 3.65 per cent; Goldman Sachs’s followed it by 0.72 per cent increase.
Government is the most cautious side with focus on the stress test results and determined not to add further to damaged confidence.
Clients will be watching carefully after losing billions of dollars in investments.
Executives and preference shareholders will be the most eager side as pressures on bonuses and dividends will be released.
Ordinary shareholders might take it as an increase in risk and therefore increase cost of capital.
Will these efforts help lowering the new shock caused by Chapter 11 bankruptcy protection sought by General Growth today? The biggest real estate failure with $29.26billion of assets and $27.29billion of debt.
We will find out soon.
At a time when government is about to announce the results of stress tests for the top nineteen US banks and conclude whether there is need for further capital injections from $700bn TARP, it is a question mark whether Goldman Sachs & JP Morgan Chase’s timing are good. What might be the motivation behind the new competition trend?
Top Wall Street banks seem to be concerned about being rescued by government funds and restricted in all activities taken including executives’ bonuses, and preference shareholders’ dividends. The possible motivations can be summarized as:
1) Saving the reputation;
2) Getting back the independence of bonus, dividend paying;
3) Attracting clients through the message of “look, I am still the best, paying back the bailout funds first”
4) Diverting public anger.
The stakeholders’ reaction to the new trend is not clear yet:
Markets digested the news positively today as JP Morgan Chase’s share price increased by 3.65 per cent; Goldman Sachs’s followed it by 0.72 per cent increase.
Government is the most cautious side with focus on the stress test results and determined not to add further to damaged confidence.
Clients will be watching carefully after losing billions of dollars in investments.
Executives and preference shareholders will be the most eager side as pressures on bonuses and dividends will be released.
Ordinary shareholders might take it as an increase in risk and therefore increase cost of capital.
Will these efforts help lowering the new shock caused by Chapter 11 bankruptcy protection sought by General Growth today? The biggest real estate failure with $29.26billion of assets and $27.29billion of debt.
We will find out soon.
Friday 10 April 2009
CORPORATE SOCIAL RESPONSIBILITY
Milton Friedman’s 1970 article in New York Times said: “Social responsibility of a business is to increase its profits” He was mentioning the sole social responsibility of business being to increase its profits through using its resources and staying within the rules of the game. What are the rules of the game?
Firms supply goods and services with the objective of maximising shareholders’ wealth. And they will have the sort of risks associated to this objective, such as losing customer satisfaction and therefore revenue; threat of new entries, substitutes; cost structure etc. Planning is needed for short, medium and long term in order to control the risks.
It is very disappointing for most of us to see very big companies hitting the wall, giving the impression they have been doing business without understanding their business environment and without forecasting the next three to six months. Three names coming immediately to my mind are:
AIG - Eighteenth largest company in the world with 116,000 employees - swallowed $170bn of the US bailout funds so far, bringing the benefits of its survival under question.
General Motors – Second largest automaker in the world with 266,000 employees - New CEO is talking about Chapter 11 bankruptcy by 1 June 2009.
RBS –With 141,000 employees and 700 branches in UK - acquired ABN AMRO with a consortium on 9th October 2007 at record price of €70billion and spread contagious subprime mortgage assets. It still can not recover, announcing 9,000 more job cuts on Tuesday, the 7th April.
Current economic environment is witnessing new ones such as Lloyds TSB’s merger with HBOS. It doesn’t appear to be a digestible transaction as Lloyds TSB has fallen from top four ranks in terms of market capitalization in 1999 to disappearing from top fifty in 2009. Share price has fallen from 860p in 1999 to 79.50p in 2009.
I agree on the importance of regulation to avoid such big, macro failures happening again but also doubt if you can really control every firm. Firms should be able to appoint the right senior management, who can lead their companies. At least the big names like AIG, General Motors, and RBS!
Firms supply goods and services with the objective of maximising shareholders’ wealth. And they will have the sort of risks associated to this objective, such as losing customer satisfaction and therefore revenue; threat of new entries, substitutes; cost structure etc. Planning is needed for short, medium and long term in order to control the risks.
It is very disappointing for most of us to see very big companies hitting the wall, giving the impression they have been doing business without understanding their business environment and without forecasting the next three to six months. Three names coming immediately to my mind are:
AIG - Eighteenth largest company in the world with 116,000 employees - swallowed $170bn of the US bailout funds so far, bringing the benefits of its survival under question.
General Motors – Second largest automaker in the world with 266,000 employees - New CEO is talking about Chapter 11 bankruptcy by 1 June 2009.
RBS –With 141,000 employees and 700 branches in UK - acquired ABN AMRO with a consortium on 9th October 2007 at record price of €70billion and spread contagious subprime mortgage assets. It still can not recover, announcing 9,000 more job cuts on Tuesday, the 7th April.
Current economic environment is witnessing new ones such as Lloyds TSB’s merger with HBOS. It doesn’t appear to be a digestible transaction as Lloyds TSB has fallen from top four ranks in terms of market capitalization in 1999 to disappearing from top fifty in 2009. Share price has fallen from 860p in 1999 to 79.50p in 2009.
I agree on the importance of regulation to avoid such big, macro failures happening again but also doubt if you can really control every firm. Firms should be able to appoint the right senior management, who can lead their companies. At least the big names like AIG, General Motors, and RBS!
Saturday 4 April 2009
MIRROR, MIRROR, TELL ME: WHO IS GOING TO SAVE THE WORLD?
G20 meeting is over. If we leave aside the protests, and casualties; What was new to bring excitement for saving the world?
We were already informed of several strict issues of bad hedge funds, credit rating agencies, tax havens; controlling banks and avoiding protectionism. The main new thing was he $1.1 trillion figure spelt to fund IMF and international trade. We are now kind of used to spell “trillion” from U.S. bailout programmes but the initial $250bn IMF funding budget was moved upwards to $1.1 trillion that will be another unforgettable number when history of credit crunch recession is written.
Stock markets welcomed the meeting though. The positive side is the determination of developed economies to fight the recession – a must to bring back the confidence -the negative side is the future burden the funding will bring on taxpayers. Now that the unemployment is on the rise, investment is scared, automatic stabilisers of lower tax and unemployment benefits should play their role until the economy comes back to life. Adding to this the stimulus spending and the result is a big future burden on taxpayers who do not have the option to invest their money in less/more risky ventures unlike shareholders.
Who is going to save the world? When comparing to team of policy makers of Great Depression, Churchill, Keynes and Hoover; Churchill voted at the top of the Great 100 Britons; Keynes, one of the best economists; [CORRECTION AS OF 11/04/2013:
Keynes's two quotes makes his world view to look one of the best. His economic policies are inefficiency, lack of competency and disastrous for 21st century]. downward spiral of Great Depression went on under Hoover bringing Roosevelt.
Roosevelt created the New Deal to provide relief for the unemployed and recovery of the economy. He was ranked as one of the greatest presidents of U.S.
We were already informed of several strict issues of bad hedge funds, credit rating agencies, tax havens; controlling banks and avoiding protectionism. The main new thing was he $1.1 trillion figure spelt to fund IMF and international trade. We are now kind of used to spell “trillion” from U.S. bailout programmes but the initial $250bn IMF funding budget was moved upwards to $1.1 trillion that will be another unforgettable number when history of credit crunch recession is written.
Stock markets welcomed the meeting though. The positive side is the determination of developed economies to fight the recession – a must to bring back the confidence -the negative side is the future burden the funding will bring on taxpayers. Now that the unemployment is on the rise, investment is scared, automatic stabilisers of lower tax and unemployment benefits should play their role until the economy comes back to life. Adding to this the stimulus spending and the result is a big future burden on taxpayers who do not have the option to invest their money in less/more risky ventures unlike shareholders.
Who is going to save the world? When comparing to team of policy makers of Great Depression, Churchill, Keynes and Hoover; Churchill voted at the top of the Great 100 Britons; Keynes, one of the best economists; [CORRECTION AS OF 11/04/2013:
Keynes's two quotes makes his world view to look one of the best. His economic policies are inefficiency, lack of competency and disastrous for 21st century]. downward spiral of Great Depression went on under Hoover bringing Roosevelt.
Roosevelt created the New Deal to provide relief for the unemployed and recovery of the economy. He was ranked as one of the greatest presidents of U.S.
Thursday 2 April 2009
Q1-09 & UNEMPLOYMENT
First quarter’s draft figures started to be appearing. US March unemployment was announced to be 746,000 and February, January were updated upwards to 706,000, 655,000 respectively (Note1). This reminded me of Fibonacci numbers where the next number is bigger than the previous in a series of numbers such that :
0 - 1 - 1 - 2 - 3 - 5 - 8 - 13 - 21 - 34 - 55 - 89 - 144 - 233 - 377 - 610 - 987 - 1597 - 2584 - 4181
The only difference with monthly US unemployment figures is the lack of existence of a relationship between the numbers. With Fibonacci numbers any number starting from the third is the sum of the previous two as can be seen below:
0+1=1
1+1=2
2+3=5
3+5=8 etc
US unemployment figures has been on an upward slope, thankfully not as bad as Fibonacci numbers would state - it would have been 1,361,000 in March as total of January and February!- although it is not still going down!
If we make the picture even bigger; of the 112 million US employees in payroll – as of 2002 statistics - 56.4 million are in small businesses AND many small businesses are expected to close in the near future. Depressed demand and dried lending is making life difficult mostly for them. They are least likely to get government bailout.
On global scale; UK unemployment is expected to increase from two million cumulative number to three million by 2011, global unemployment to increase by fifty-one million in 2009 in the worst case scenario.
We were talking to an entrepreneur friend of mine the other day and one possibility we were both concerned was war. Unemployment is the strongest indicator of this probability. OECD is already talking about having double digit percentage of unemployment at the end of 2009.
Watching the protests against the G20 meeting held in London, one protester dying, many being injured, taken under custody remind the history of wars.
Is there a sun shining somewhere? May be the determination shown by G20 leaders to fight, lending $1.1trillion to IMF and opening the channels for IMF to lend from the markets if necessary. Markets welcomed this determination with Nasdaq, Dow Jones, Nikkei all up.
We hope to get there eventually without having a Third World War. Fingers crossed!
Note1: Figures were updated on Friday, the 3rd April as Jan: 741,000; Feb: 651,000; Mar: 663,000
NOTE: An article in www.cnbc.com on 5th August 2011:
Fibonacci Fate Date for a Bear Bond Market?
Published: Friday, 5 Aug 2011 | 3:24 PM ET
Text Size
By: Rick Santelli
When I was an institutional broker in a former life, I was a believer in the merits of using technical analysis. I found that it was a very useful tool that complemented the much more mainstream tools generically referred to as fundamental analysis.
Many don’t put much stock in technical analysis. I understand that. A former institutional client of mine once said: “At the bottom of the ocean are many sunken vessels, and in each one there is a chart room filled with charts.” But there is another perspective. The markets represent the aggregate interaction of many investors. Their attitudes, philosophies, and behavioral patterns on many levels are predictable….and repetitive.
One of the greatest technicians of all time was a man named W. D. Gann (1878-1955). He had tremendous success predicting market moves much in advance. Legend has it that he occasionally sent notes to The Wall Street Journal, which accurately predicted tops and bottoms in grain markets months ahead of time.
There are two Gann principles that I have always respected. They are that historical prices alone aren’t predictive unless paired with time; and that the “birth dates” of contracts are of major significance. The birth date is the first day a contract, stock, or grain begins trading. And birth dates that occur during "Fibonacci" years are even more significant. The larger the Fibonacci number, the more significant.
Leonardo Fibonacci, the great 13th century Italian mathematician (1175–1250) created the “Fibonacci sequence” to explain behavior in nature mathematically. History has it that the first question he posed was how many rabbits would be created in one year starting with one pair.
The sequence is actually quite simple. Start with "1" and add the previous number to create the next. So, 1 + 0= 1, 1 + 1 =2, 2 +1 =3, 3 + 2=5, 5 +3 =8….and so on…so the sequence is…0,1,1,2,3,5,8,13,21,34,55,89,144,233 and so on. Mathematicians have been enamored with the sequence ever since. It not only predicted rabbits' explosive reproduction numbers, but accurately measures a wide array of activity and behavior in nature.
Over time, this sequence was used by the master painters to define the dimensions of their paintings. There is something “pleasing” to humans about the proportions defined by the sequence. Think of 3x5 index cards, or how many times most people knock on a door, or ring the phone….3 is the most common, 5 is second. Humans have 5 senses, five fingers. The patterns of the spiral of sunflowers seeds also can be explained using the sequence.
The Fibonacci sequence also gives us the “golden mean” used in many mathematical calculations. The golden mean is 1.61—which is arrived at by dividing a Fibonacci number by the previous number. For example 89/55=1.61. Going the other direction 55/89=.61—which is how market technicians come up with Fibonacci retracements. Skip a number, 55/144=.38, the next retracement. I could go on with the many combinations used by market technicians. Suffice it to say the harmony of these numbers in nature was the cornerstone of much of W.D. Gann’s work to explain grain markets' pricing behaviors.
The other application of the sequence by Gann was with respect to time. Consider how 21- and 55-day moving averages are a favorite of purist technicians. It was this aspect of time when applied to the “birth dates” of markets that I wish to concentrate on—specifically for the Treasury market.
On August 22, l977, the Chicago Board of Trade started trading 30-year bond futures. This year, August 22 falls on a Monday. It will be the THIRTY-FOURTH ANNIVERSARY (34 is a Fibonacci number). My goal is not to make a market prediction as much as to share a fascinating possibility.
The next Fibonacci number is 55, it's a difference of 21, which could determine the length of the next cycle. If this Gann cycle is accurate, it may mean a cycle high in price, a cycle low in rates in the Treasury complex could occur possibly on August 22, or thereabouts. Another way to look at this would be, that it may be the BEGINNING OF A 21-YEAR CYCLE in lower prices, higher rates.
Simply stated, if this measure were truly predictive, it could mean the end of a bull cycle and the beginning of a bear cycle in Treasury prices. This may not mean that once the cycle's low yield is reached, the market will immediately reverse. Yet, if you were to look back , over time it could show up as an important turning point in the market.
There have been several large changes over the years in the bond contract, like a coupon change 11 years ago from an 8-percent coupon to the current 6-percent coupon. I can’t say if that would distort Gann’s theories. At the margins I hope readers find this interesting. Yet for those of you out there that believe in a higher order to human behavior, this could prove to be a prediction that W.D Gann might have mailed into CNBC if he was alive today.
© 2011 CNBC.com
0 - 1 - 1 - 2 - 3 - 5 - 8 - 13 - 21 - 34 - 55 - 89 - 144 - 233 - 377 - 610 - 987 - 1597 - 2584 - 4181
The only difference with monthly US unemployment figures is the lack of existence of a relationship between the numbers. With Fibonacci numbers any number starting from the third is the sum of the previous two as can be seen below:
0+1=1
1+1=2
2+3=5
3+5=8 etc
US unemployment figures has been on an upward slope, thankfully not as bad as Fibonacci numbers would state - it would have been 1,361,000 in March as total of January and February!- although it is not still going down!
If we make the picture even bigger; of the 112 million US employees in payroll – as of 2002 statistics - 56.4 million are in small businesses AND many small businesses are expected to close in the near future. Depressed demand and dried lending is making life difficult mostly for them. They are least likely to get government bailout.
On global scale; UK unemployment is expected to increase from two million cumulative number to three million by 2011, global unemployment to increase by fifty-one million in 2009 in the worst case scenario.
We were talking to an entrepreneur friend of mine the other day and one possibility we were both concerned was war. Unemployment is the strongest indicator of this probability. OECD is already talking about having double digit percentage of unemployment at the end of 2009.
Watching the protests against the G20 meeting held in London, one protester dying, many being injured, taken under custody remind the history of wars.
Is there a sun shining somewhere? May be the determination shown by G20 leaders to fight, lending $1.1trillion to IMF and opening the channels for IMF to lend from the markets if necessary. Markets welcomed this determination with Nasdaq, Dow Jones, Nikkei all up.
We hope to get there eventually without having a Third World War. Fingers crossed!
Note1: Figures were updated on Friday, the 3rd April as Jan: 741,000; Feb: 651,000; Mar: 663,000
NOTE: An article in www.cnbc.com on 5th August 2011:
Fibonacci Fate Date for a Bear Bond Market?
Published: Friday, 5 Aug 2011 | 3:24 PM ET
Text Size
By: Rick Santelli
When I was an institutional broker in a former life, I was a believer in the merits of using technical analysis. I found that it was a very useful tool that complemented the much more mainstream tools generically referred to as fundamental analysis.
Many don’t put much stock in technical analysis. I understand that. A former institutional client of mine once said: “At the bottom of the ocean are many sunken vessels, and in each one there is a chart room filled with charts.” But there is another perspective. The markets represent the aggregate interaction of many investors. Their attitudes, philosophies, and behavioral patterns on many levels are predictable….and repetitive.
One of the greatest technicians of all time was a man named W. D. Gann (1878-1955). He had tremendous success predicting market moves much in advance. Legend has it that he occasionally sent notes to The Wall Street Journal, which accurately predicted tops and bottoms in grain markets months ahead of time.
There are two Gann principles that I have always respected. They are that historical prices alone aren’t predictive unless paired with time; and that the “birth dates” of contracts are of major significance. The birth date is the first day a contract, stock, or grain begins trading. And birth dates that occur during "Fibonacci" years are even more significant. The larger the Fibonacci number, the more significant.
Leonardo Fibonacci, the great 13th century Italian mathematician (1175–1250) created the “Fibonacci sequence” to explain behavior in nature mathematically. History has it that the first question he posed was how many rabbits would be created in one year starting with one pair.
The sequence is actually quite simple. Start with "1" and add the previous number to create the next. So, 1 + 0= 1, 1 + 1 =2, 2 +1 =3, 3 + 2=5, 5 +3 =8….and so on…so the sequence is…0,1,1,2,3,5,8,13,21,34,55,89,144,233 and so on. Mathematicians have been enamored with the sequence ever since. It not only predicted rabbits' explosive reproduction numbers, but accurately measures a wide array of activity and behavior in nature.
Over time, this sequence was used by the master painters to define the dimensions of their paintings. There is something “pleasing” to humans about the proportions defined by the sequence. Think of 3x5 index cards, or how many times most people knock on a door, or ring the phone….3 is the most common, 5 is second. Humans have 5 senses, five fingers. The patterns of the spiral of sunflowers seeds also can be explained using the sequence.
The Fibonacci sequence also gives us the “golden mean” used in many mathematical calculations. The golden mean is 1.61—which is arrived at by dividing a Fibonacci number by the previous number. For example 89/55=1.61. Going the other direction 55/89=.61—which is how market technicians come up with Fibonacci retracements. Skip a number, 55/144=.38, the next retracement. I could go on with the many combinations used by market technicians. Suffice it to say the harmony of these numbers in nature was the cornerstone of much of W.D. Gann’s work to explain grain markets' pricing behaviors.
The other application of the sequence by Gann was with respect to time. Consider how 21- and 55-day moving averages are a favorite of purist technicians. It was this aspect of time when applied to the “birth dates” of markets that I wish to concentrate on—specifically for the Treasury market.
On August 22, l977, the Chicago Board of Trade started trading 30-year bond futures. This year, August 22 falls on a Monday. It will be the THIRTY-FOURTH ANNIVERSARY (34 is a Fibonacci number). My goal is not to make a market prediction as much as to share a fascinating possibility.
The next Fibonacci number is 55, it's a difference of 21, which could determine the length of the next cycle. If this Gann cycle is accurate, it may mean a cycle high in price, a cycle low in rates in the Treasury complex could occur possibly on August 22, or thereabouts. Another way to look at this would be, that it may be the BEGINNING OF A 21-YEAR CYCLE in lower prices, higher rates.
Simply stated, if this measure were truly predictive, it could mean the end of a bull cycle and the beginning of a bear cycle in Treasury prices. This may not mean that once the cycle's low yield is reached, the market will immediately reverse. Yet, if you were to look back , over time it could show up as an important turning point in the market.
There have been several large changes over the years in the bond contract, like a coupon change 11 years ago from an 8-percent coupon to the current 6-percent coupon. I can’t say if that would distort Gann’s theories. At the margins I hope readers find this interesting. Yet for those of you out there that believe in a higher order to human behavior, this could prove to be a prediction that W.D Gann might have mailed into CNBC if he was alive today.
© 2011 CNBC.com
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