Importance of the feel good factor

I hope this explains why we might have a bumpy road to recovery ahead!!

Credit crisis in the making!!

Credit crisis in the making.. short and simple !

1. To understand the crisis lets first under stand the whole –process.

- Commercial banks sell loans get mortgages

- Investment banks buy mortgages from commercial banks, collaterised them and issues CDOs (trenches: superior/safe, mezzanine, equity/ unrated)

- Investors (Pension funds, hedge funds, individual investors) buy these trenches/ securities and keep with them / rebundle.

2. Scenario in 2002-2005
- Treasuries rate remain very low @ 1% even after a recovery in 2003 (loose monetary policy)
- Mortgages become really cheap and there was a lending boom
- Investors were not getting much returns on treasuries and started looking for other safe alternatives
- CDOs (superior trenches having AAA ratings) give better returns to the investor vis-à-vis treasuries.
- Demand for CDOs/ CLOs/ ABCPs increased.

SUB Prime:
- Commercial banks started lending to the sub prime lender to accommodate the demand.
- They introduced various schemes to rope in sub prime segments:
- No down payments, step up interest rate, no securities etc. All this under the premise that housing prices will keep increasing and the sub prime home owner can dispose of the property after few years.

3 Scenario in 2006-2009
- Home prices stagnated and even started decreasing. Interest rate also started to increase. This resulted in an increase in Sub prime default rate.
- This had a cascading effect:
...... Investors become weary of CDOs and other financial instruments (this was the result of bundling and rebundling of other financial securities with CDOs and subprime)

...... Lack of market for CDOs broughtdown the market prices
...... This further put pressure on already stressed LTV (loan to value) ratio.
...... Investors having these CDOs as financial assets had to report losses due to MtM (marked to market)pricing concept
...... Consequently they had to unwind their portfolio and sell securities (CDOs in the market) putting further pressure on prices and a vicious cycle took place.

4 Spreading of the crisis:
- Banks started taking less and less risk and started hoarding cash. They almost stopped lending to banks (call money rate went up), individuals (mortgage market further declined) and companies. Causing a financial meltdown.
- Institution and economies that worked on principle borrow short and lend long started failing as they found it increasing difficult to refinance the loans. Causing further pressure on the market. (Classical example is the case of Dubai).
- Businesses found it difficult to get loans. Banks were hoarding cash and bond markets were practically dead. Businesses stopped new and existing projects.
- Businesses started downsizing. Consumer confidence fell to the rock bottom. Consumerism went down and another vicious cycle took place!

Can't live without it, but can't live with it (in my portfolio).

The Internet Is Dead… well as an Investment.

I can spend the whole day on the Internet and it would be a day well spent. I can chat, listen to music, watch videos, study, trade stocks, play games, do work - all on the Internet and I believe that its true for almost everybody in my generation. But still when it comes to getting advertisements(revenues) on the Internet, even big names scramble to find a few.

To share a few stories: Microsoft has spent zillions on Internet strategy without a single ray of hope. Every other day Yahoo is closing some of its offering, today it was geocities. Even Google finds it difficult to introduce any other business model other than the one they stumbled upon when they bought Applied Semantics in 2001 that had a little piece of software called AdSense. Google's flagships- Gmail, Youtube, Orkut, Google Earth are all bleeding. Time Warner would rather keep their legacy old media businesses than hold onto one of the biggest Internet companies out there, AOL. News Corporation is shaking up its MySpace business as it figures out its next steps. And the new business in the block: Twitter and Facebook are still struggling for profits despite exponential usage growth

Don't just ask me. Ask the best – Warren Buffet. Nobody can figure out a business model.

Gone are the days of infinite margins, 1000% productivity gains, and growth of market throughout the universe. Internet companies are, at best, like utility companies albeit the only difference being that they get bought at about 10 times earnings and sold at 13 times earnings.

Let's face it. Electricity greatly improved our quality of life. But we are not going to get excited about buying a basket of utility companies. Now, the same applies to the the Internet. Can't live without it, but can't live with it (in my portfolio).

CDS riddle

It isn’t the housing market devaluation, or the sub-prime mortgage market defaults that have us in real trouble. Those are nice fakes to sway attention away from the place where greed truly flourished — trading phony instruments to the tune of $700 trillion.

Let’s figure how to get out from under that. Then maybe the capital will begin to flow again through the markets. Right now, this elephant isn’t just in the room, it’s sitting on us. Banks in Europe and the US face a new wave of losses linked to contracts issued to insure against companies going bust and defaulting on their loans, City analysts have warned. After the billions lost over the US subprime market and leveraged loans, investment banks such as Morgan Stanley, Deutsche Bank, Barclays, UBS and RBS face losses on credit default swaps (CDS) – contracts that allow an investor to be repaid if a company loan or a bond defaults. CDS contracts became a favourite tool of speculators, mostly hedge funds, which bought the contracts without having any link to the original lending. They bought the contract to trade or in the expectation the company would in fact default, meaning they could claim back the full value of a loan they never made.

The CDS market exploded to be worth as much as $50 TRILLION, many times the size of the underlying assets. Each loan could have thousands of protection contracts, even if there were only a few lenders. Hedge funds accounted for about 60% of CDS trading, according to ratings agency Fitch.

The reality of the situation is akin to a game of musical chairs — without any chairs. So now the music has finally stopped.

Lingering financial crisis - a satirical explanation

My apologies for putting an old joke in this blog (Actually, of late I got tired of reading the bad news all over the net). Nevertheless, this joke does a pretty good job of explaining the lingering financial crisis and aptly ridicules the corporate world’s reactions towards solving this crisis. The joke:

Boat Race
Two teams, Team A and Team B decided to engage in a competitive boat race. Both teams practiced to reach their peak performance. On the big day, Team B won by a mile. Afterwards, Team A was shattered by the loss. Their morale sagged. Corporate management decided that the reason for the crushing defeat had to be found. So a consulting firm was hired to investigate the problem and recommend corrective action. The consultant's findings: The Team B team had eight people rowing and one person steering; Team A team had one person rowing and eight people steering. After a year of study and millions spent analyzing the problem, the consultant firm concluded that too many people were steering and not enough were rowing on Team A.
With this new finding they decided to go for another race. So as the D day nears, Team A decided to completely reorganize their team structure. The new structure: four steering managers, three area steering managers and a new performance review system for the person rowing the boat to provide work incentive.
The next year, Team B won by two miles. Humiliated, Team A's corporation laid off the rower for poor performance and gave the managers a bonus for discovering the problem....