Is Money Market Fund safe? That is the big question. And no one has right answer. Login to your brokerage account and check the 7-day yield of swaping money market account . Do not surprise if it is over 4%. I am talking about CA Tax Free money market account, so taxable yield is over 6%. Any point over 3.5% is consider risky this days.
So what is going on? The bank are looking for your money - to raise the capital. So this is the way they are attracting investor. The money market fund usually buy Commerical short term papers and other short term securities. This securities are too many in the market and fewer buyer, hence its prices has gone down and yield going up. So your brokerage is passing this high yield to you. Very unusal, I have never imaging this could happen. This does not mean underlying security is very risky. If this underlying securities are risky then you will see the value of your $1 money market fund will be $0.97 or even lower after some time. People says that it never happend, but it happend last week. Since August, Wamu was offering 5% FDIC insured CD for 1 year and 4% in saving account. (It is still available Sep 24, 2008) Fed overnight rate is 2% and treasury yield is less than 1%, however they are offering 4.5%, something is cooking which is beyond our imaginations. I think they want to raise the capital. I just found the news that Wamu is taken control by FDIC through JPM or in other word 12th bank failed this year. Here is the list of all failed banks since 2000.
This high yield investmet securities will be available at lower price until the market stabilizes and find the buyer for this securities. At this point, international buyer are going away from US, we have record outflow of investment dollor in July. So here is the question again, where to put the money?
My mother used to tell me if you have money, do not put in the bank - Buy Gold.
Thursday, September 25, 2008
Sunday, September 14, 2008
Armageddon Has Arrived ...
Finally, Lehman will file bankruptcy, or at least it looks like this way.
Greenspan said more firms will fails, the crisis is once in a century. He should get some credit for this crisis.
AIG, the biggest insurer is in trouble, that means most of the retiree, who has annuity they are in trouble.
The rating agency in trouble, so no one know what is the value of Bond.
Merill Lynch cannot survived by its own, they are in talk to merge with Bank of America.
Wamu is next one, if need bailout it need 24B tax payer money.
So what will happen tomorrow ? a) Market will down 5%, black monday, b) Fed will reduce 1 point, c) Market will close in memory of Lehman :-
....will know more later.
Greenspan said more firms will fails, the crisis is once in a century. He should get some credit for this crisis.
AIG, the biggest insurer is in trouble, that means most of the retiree, who has annuity they are in trouble.
The rating agency in trouble, so no one know what is the value of Bond.
Merill Lynch cannot survived by its own, they are in talk to merge with Bank of America.
Wamu is next one, if need bailout it need 24B tax payer money.
So what will happen tomorrow ? a) Market will down 5%, black monday, b) Fed will reduce 1 point, c) Market will close in memory of Lehman :-
....will know more later.
Saturday, September 13, 2008
Alt-A Loan problem still to come
The mess of sub-prime mortgage is almost over but there is another problem that financial companies need to worry about i.e. Alt-A loan. Alt-A (Alternate Document) loan is the loan given to the people who has good credit but does not want to show the document related to asset and income such as W2/1040/Bank Statement and so forth. Going forward, you will hear the news of Alt-A loan problem. About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding. 70% of them has exaggerated their income by 50% or more. $400 billion of that was sold in 2006. Almost 16% of Alt-A loans issued since January 2006 are at least 60 days late. Many of these loans (around $270 billion) were interest-only, and the resets were at 3- and 5-year lengths. That means starting next year we are going to see a wave of mortgages resetting to new rates hence it will increase the foreclosure rate.
Fannie own 340B, Freddie own 190B, Wachovia own 122B and Washington Mutual own 53B of Alt-A loan. If you look at their stock its already built into it. But if it go worst, this companies has no future. And due to this, housing is not near bottom, according to the Schiller. Housing went 20% down and it will down further more 10%. Housing fell 30% in great depression. This is the time nothing less than Great Depression as 164 years old company, Lehman brothers, is struggling to survive. This company survived Civil War, Panic of 1907, World Wars, Great Depression, and many deep recessions. But as of now, they are looking for buyer. You can imagine how bad it is.
There is one more problem apart from this I will cover later.
Fannie own 340B, Freddie own 190B, Wachovia own 122B and Washington Mutual own 53B of Alt-A loan. If you look at their stock its already built into it. But if it go worst, this companies has no future. And due to this, housing is not near bottom, according to the Schiller. Housing went 20% down and it will down further more 10%. Housing fell 30% in great depression. This is the time nothing less than Great Depression as 164 years old company, Lehman brothers, is struggling to survive. This company survived Civil War, Panic of 1907, World Wars, Great Depression, and many deep recessions. But as of now, they are looking for buyer. You can imagine how bad it is.
There is one more problem apart from this I will cover later.
Saturday, September 06, 2008
Financial Crisis Continues
While Fed Chief, Treasury Sec, and Top Management of Fennie and Freedie are working on right now for Fannie and Freddie future; lets take a look at what crisis going on. We keep reading the news about Banks has trouble raising the capital. Why this is important?
The crisis are started by leveraging the money 30 to 50 times and investing in the risky assets. This is same analogy when people sold their gold and buy stocks, back in 2000. But this time Bank and Brokerage are caught up.
Let's do some mathematics here. Usually, banks (FDIC insured) on average has about 8% of capital for their assets, and loans are 60% of assets. It means they have leverage the money approximately 12 times (60 divide by 8) . What does this leverage means? For example, if you have 100k in your bank in CD (i.e your Capital), then you (if not you than bank) can borrow and lend 1.2M (100k X 12). You have done 12 time leverage of your capital. So if you paying 2% (Current Fed Rate) for your money you borrow and charge 6% to other for the loan. The loan could be for Car, Mortgage, Home Remodel or may be to take vacations. So you can make profit of 4% (6%-2%) on 1.2M i.e 48k. You just made profit of 42k on 100k. This is 42% gross profit on your invested capital. Amazing, isn't it? This is why you see small banks are started.
Now, let's take a look at risk factor. Out of 1.2 M you lend, let says 10% if it (i.e. 120k) is bad loan. The person you lend forclose the home, or they have no money to pay for whatever the reason. So all of your profit i.e 42k gone and on top of that it dipped on your capital. So 1.2M + 42k (Profit) - 120k (loss) = 1.122 M. So you need to raise 78k. (1.2M - 1.122M) or you have to reduce your loan porfolio and have a write down the loss.
This is why you see the news about raising the capital and write down the loss. In this example above, I have just used 12 time leverage and 10% bad loan, the brokerage firm like Bear Stern made 44 times leverage. Fannie and Freddie made 50 times of leverage. Fannie and Freddie combined has a loan of 6 Trillion, half of the whole mortgage market which is 12 Trillion. Considering house price went down 20% so far; and delinquency rate is still high more than 4.5%. If you apply this number with above formula it is no brainier Fed has to bail out Fannie and Freddie. Not only that, one more top tier bank has to go out of business.
Merill Lynch are selling the asset to raise the capital and so what Fannie do, but there is not enough demand in the market to buy this assets. Couple of weeks back, Merill sold all of the mortgage portfolio for 22c for the $1 value (They sold 30.6B asset for 6.7B.), on top of that they give buyer (Loan Star) a financing of 75% of it. So basically that means they may get 5 cents for the face value of one dollar. Additionally, they will sell 8.5B in stock, so it will dilute the value of share by 38%. This is how the bad it can go, and this is the reason why Goldman rates Merill stock to Sell.
And not only US bank is on this mess, country like Singapore, Kuwait, UAE all has invested on this brokerages and banks (Merill, Morgan Stanley, Citigroup, Barclays, UBS ) as a part of raising the capital in 2007 and 2008. They are all down more than 40%. So far Banks and Brokerage Firms across the world has write down 500B, more to come.
I am not saying it is the end of the world; the market will find the solution. But there is some more short-term pain for many investors like me, and we need to be aware of the problems and see if we can avoid them for ourselves.
Update as of 9/7/2008: US Govt has undertake Fannie and Freddie under Conservatorship for indefinite time, they will get a credit line of upto 20B/month from treasury, to save 2B they are going to cut 100% dividend on Stock and Preferred Stock, but they will pay the debt, common stock will be last on the line, so it won't wipe 100%. Most of the detail can be found below:
The crisis are started by leveraging the money 30 to 50 times and investing in the risky assets. This is same analogy when people sold their gold and buy stocks, back in 2000. But this time Bank and Brokerage are caught up.
Let's do some mathematics here. Usually, banks (FDIC insured) on average has about 8% of capital for their assets, and loans are 60% of assets. It means they have leverage the money approximately 12 times (60 divide by 8) . What does this leverage means? For example, if you have 100k in your bank in CD (i.e your Capital), then you (if not you than bank) can borrow and lend 1.2M (100k X 12). You have done 12 time leverage of your capital. So if you paying 2% (Current Fed Rate) for your money you borrow and charge 6% to other for the loan. The loan could be for Car, Mortgage, Home Remodel or may be to take vacations. So you can make profit of 4% (6%-2%) on 1.2M i.e 48k. You just made profit of 42k on 100k. This is 42% gross profit on your invested capital. Amazing, isn't it? This is why you see small banks are started.
Now, let's take a look at risk factor. Out of 1.2 M you lend, let says 10% if it (i.e. 120k) is bad loan. The person you lend forclose the home, or they have no money to pay for whatever the reason. So all of your profit i.e 42k gone and on top of that it dipped on your capital. So 1.2M + 42k (Profit) - 120k (loss) = 1.122 M. So you need to raise 78k. (1.2M - 1.122M) or you have to reduce your loan porfolio and have a write down the loss.
This is why you see the news about raising the capital and write down the loss. In this example above, I have just used 12 time leverage and 10% bad loan, the brokerage firm like Bear Stern made 44 times leverage. Fannie and Freddie made 50 times of leverage. Fannie and Freddie combined has a loan of 6 Trillion, half of the whole mortgage market which is 12 Trillion. Considering house price went down 20% so far; and delinquency rate is still high more than 4.5%. If you apply this number with above formula it is no brainier Fed has to bail out Fannie and Freddie. Not only that, one more top tier bank has to go out of business.
Merill Lynch are selling the asset to raise the capital and so what Fannie do, but there is not enough demand in the market to buy this assets. Couple of weeks back, Merill sold all of the mortgage portfolio for 22c for the $1 value (They sold 30.6B asset for 6.7B.), on top of that they give buyer (Loan Star) a financing of 75% of it. So basically that means they may get 5 cents for the face value of one dollar. Additionally, they will sell 8.5B in stock, so it will dilute the value of share by 38%. This is how the bad it can go, and this is the reason why Goldman rates Merill stock to Sell.
And not only US bank is on this mess, country like Singapore, Kuwait, UAE all has invested on this brokerages and banks (Merill, Morgan Stanley, Citigroup, Barclays, UBS ) as a part of raising the capital in 2007 and 2008. They are all down more than 40%. So far Banks and Brokerage Firms across the world has write down 500B, more to come.
I am not saying it is the end of the world; the market will find the solution. But there is some more short-term pain for many investors like me, and we need to be aware of the problems and see if we can avoid them for ourselves.
Update as of 9/7/2008: US Govt has undertake Fannie and Freddie under Conservatorship for indefinite time, they will get a credit line of upto 20B/month from treasury, to save 2B they are going to cut 100% dividend on Stock and Preferred Stock, but they will pay the debt, common stock will be last on the line, so it won't wipe 100%. Most of the detail can be found below:
LINKS
Monday, September 01, 2008
Yet another browser
We have one more browser available to consumer, most probably starting Sep 2, 2008. This one is from Internet Giant Google, the project Chrome was going on for a long time and it has several rumors in the past about it. But this time it is official.
They have introduced it with the comic book, an easily book to read by anyone. Here is the book if you want to see. Chrome has a lot of features better than Internet Explorer 8 Beta, which Microsoft is working on. I love the innovation and competition. One can expect the browser could be very fast, easy to use, easy enough for grandpa, so they click on Google Ad. One feature about privacy is "incognito window", allows user to browse but nothing in this window will be logged into the computer. This feature will help tremendously in Library and public computer.
Reading this comic book about Google Chrome make me exciting about this new browser. First, big kudos to Scott McCloud, a cartoonist, who done a fantastic job of illustrating the concepts around modern browser design and engineering.
Final verdict will be tomorrow.
They have introduced it with the comic book, an easily book to read by anyone. Here is the book if you want to see. Chrome has a lot of features better than Internet Explorer 8 Beta, which Microsoft is working on. I love the innovation and competition. One can expect the browser could be very fast, easy to use, easy enough for grandpa, so they click on Google Ad. One feature about privacy is "incognito window", allows user to browse but nothing in this window will be logged into the computer. This feature will help tremendously in Library and public computer.
Reading this comic book about Google Chrome make me exciting about this new browser. First, big kudos to Scott McCloud, a cartoonist, who done a fantastic job of illustrating the concepts around modern browser design and engineering.
Final verdict will be tomorrow.
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