# Market Risk



## drillinto (21 April 2007)

http://www.nasd.com/InvestorInforma...ketRiskWhatYouDontKnowCanHurtYou/NASDW_018891


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## stockGURU (21 April 2007)

Drillinto, maybe you could share your thoughts on this topic.

I was under the impression the thread starter was supposed to stimulate some discussion by sharing their thoughts. 

Why did you start this thread?


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## drillinto (21 April 2007)

stockGURU said:


> Drillinto, maybe you could share your thoughts on this topic.
> 
> I was under the impression the thread starter was supposed to stimulate some discussion by sharing their thoughts.
> 
> Why did you start this thread?




Good question. I liked the summary on Market Risk and wanted to share it with the forum participants...


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## drillinto (21 April 2007)

Sociopolitical Risk involves the impact on the market in response to political and social events such as a terrorist attack, war, pandemic, or elections. Such events, whether actual or anticipated, affect investor attitudes toward the market in general, resulting in system-wide fluctuations in stock prices. Furthermore, some events can lead to wide-scale disruptions of financial markets, further exposing investments to risks.


Country Risk is similar to the Sociopolitical Risk described above, but tied to the foreign country in which investment is made. It could involve, for example, an overhaul of the country's government, a change in its policies (e.g., economic, health, retirement), social unrest, or war. Any of these factors can strongly affect investments made in that country. For example, a country may nationalize an industry or a company may find itself in the middle of a nationwide labor strike.


A very good example of Sociopolitical and Country Risks is the Republic of Guinea(West Africa). Following major political upheaval a new government was recently installed. This government will now review ALL mine deals:

http://www.miningweekly.co.za/article.php?a_id=107158


Bottom line: Stick to OZ !


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## drillinto (21 April 2007)

For an engaging introduction to the oddsmakers:

"Against the gods. The remarkable story of risk"
by Peter L. Bernstein
Publisher: John Wiley & Sons, Inc. (1998)

No one should miss it.


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## stoxclimber (23 April 2007)

When considering risk [usually measured by standard deviaton/variance], even in a market context, one should always consider DOWNSIDE risk rather than risk as a whole. If you don't believe the returns on stock X are normally distributed [and if you are trying to buy undervalued companies etc. you probably don't] then one should adapt their view of risk accordingly. For example, if you're investing in a company with a mining project in African country XYZ and the political climate in XYZ is so bad that it just cant get much worse, then although the actions of XYZ's regime are very unpredictable [i.e. a high degree of risk], most of it is on the upside!


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## drillinto (26 April 2007)

Laos

From Our Risk Analyst From Risk Bureau
April 25, 2007

The fact that Laos is one of the world’s few remaining communist states makes it fairly unique and possibly helps explain its status as one of the poorest countries in East Asia. Although it lacks the dynamism of some of its neighbours progress of sorts, albeit from a very low base, has been made as a result of the authorities’ willingness to encourage private enterprise. Thus impressive average annual growth rates of six per cent between 1988 and 2006 was achieved, although its currency lost more than nine-tenths of its value against the US dollar during the 1997 Asian financial crisis. Very gradually, things have begun looking up for the Laotians, although the investors’ watchword should be patience.
Do not expect change to occur overnight. The Lao People’s Revolutionary Party, the ruling Communist Party, is the only legal party in the country, and not surprisingly, in the April 2006 elections won virtually all the seats in Parliament. Consequently, corruption is rife among the rank and file of the Party. According to the Asian Development Bank, approximately 25 per cent of Laos’s budget is unaccounted for each year. Transparency International ranks the country 111th out of the 165 countries it rates.  
Equally problematic for foreign investors is the country’s abysmal infrastructure. The catalogue is fairly dispiriting: the road system is basic; electricity is restricted to a few urban areas, while there is a very limited telecommunications system. Indeed, electronic banking was until very recently unknown, until the country’s first private local bank, Phongsavanh Bank, opened a point-of-sale electronic database and an ATM. Not surprisingly, Laos remains reliant for financial support on foreign donors and institutions, with the International Monetary Fund leading the way. Its heavy reliance on subsistence agriculture, dominated by the cultivation of rice which accounts for half its GDP and employs some 80 per cent of the population has been the pattern, although having acquired Normal Trade Relations status with the US in 2004 has meant lower tariffs for its exports. 

If the Laotian authorities play their cards right, the country’s reliance on agriculture could be reduced and balanced by investment in the hydropower and mining sectors. Its natural resources include timber, gypsum, tin, gold and gemstones. Oxiana, which operates in Australia and Laos, met its production targets producing 60,803 tonnes of copper cathode last year and 173,524 ounces of gold. In March, the Thai company, Bapu Power, a subsidiary of the country’s largest coalminer Banpu, announced its intention to find a partner to invest jointly in the Hong Sa Lignite mine and power plant project in Laos in which the Laotian government will be “one of the shareholders”. 

Vientiane has thus far approved 118 projects to explore and mine for various metals. It has issued licenses to some 66 companies, 33 of which are 100 per cent foreign-owned. However, of the 118 approved projects, only 36 have begun exploration and mining, which has necessitated the establishment of a government special task force to monitor compliance. 

Meanwhile, China’s Sino Hydro, has entered into a joint venture with Laos’s State Electricity Enterprise to build a fifth dam on the Nam Ngum River, which aims to produce electricity for sale to Thailand by 2011. Equally, Laos intends building 29 hydro-power projects operational by 2020 in order to sell some 5,000 megawatts of electricity to Thailand’s EGAT by that date. A provincial delegation from China’s Yunnan province arrived in Laos in April. Among the items on its agenda was a request for permission to build a five-star hotel in Luang Prabang, designated as a world heritage site; and the delegation put down a marker for investment in iron ore excavation in Laos as well as planting crops to produce biodiesel. 

Very gradually therefore, foreign investors are taking note, and the government has begun to play its part. Policy changes in the pipeline should help spur growth. A value-added tax (VAT) regime, expected to start in 2008, will streamline the government’s hitherto inefficient tax system. Construction will be a strong driver of the economy especially as hydroelectric dams and road projects come on stream. The fact that Laos is taking steps to join the World Trade Organisation ought to improve the business environment. 

Forecast = Steady as she goes
For a poor country still wedded in theory at least, to Communist principles, Laos has had decades of wasted opportunities. Nevertheless, ever so slowly, the authorities appear to have come to the realisation that it needs to attract foreign investment especially in the mining and hydropower sectors  which might help drag the country out of poverty. It is beginning to appear that the Communist rulers and foreign investors’ interests have begun to dovetail; although the latter would be advised to be patient. Laos has slumbered for generations and its awakening will at best be slow and at times painful. 

• A communist state gradually welcomes foreign investors
• Hydropower and mining sectors offer interesting prospects


Source: www.minesite.com


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## drillinto (5 May 2007)

Q & A with Peter Bernstein (Foremost risk expert)

http://www.marketwatch.com/News/Sto...EC1-2602-4D93-ADAA-B0BD4D5DEC59}&siteid=nwhpf


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## drillinto (8 May 2007)

One alternative tool to assess Market Risk: the magazine cover indicator

http://www.economist.com/finance/displaystory.cfm?story_id=9122878


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## drillinto (9 May 2007)

Market's appetite for risk varies

http://news.independent.co.uk/business/comment/article2516631.ece


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## drillinto (25 May 2007)

The alchemists of finance and risk

http://www.economist.com/surveys/displaystory.cfm?story_id=9141486


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## drillinto (13 June 2007)

Risk managers are starting to focus on the environment

http://www.garp.com/resources/newsfeed.asp?Category=6&MyFile=2007-06-08-14847.html


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## drillinto (23 June 2007)

The risky diamonds...

June 21, 2007

The Saga Of Cape Diamonds Gets Odder And Odder
Source: www.minesite.com


So the saga of Cape Diamonds goes on. A book will be written about it before long and the title would have to be ‘Sex and Stupidity’. These seem to be the main themes to date and none of it does any good to those poor punters who thought they were getting a straight deal at the time of the IPO just about a year ago when the company raised £13 million at £2.50/share. Last December the shares were suspended at the company’s behest as it was apparently unable to assemble its results for the period to June 2006. Now the shares have been relisted, with a notable lack of fanfare, and were trading at 65p yesterday. Phew!!!! No wonder the men from NASDAQ were able to claim that AIM was little more than a casino.

Now we  see that  a company called Golden Hope has invested £1.52 million net in the company at a price of £1 per share to give it a 4.62 per cent holding. Nice to be able to find someone willing to lose their money so fast and congratulations must obviously go to Masoud Alikhani, the chairman of the company, and Manie Silver who is still hanging in there as chief executive. In January, it will be remembered, the three non-executive directors, all of whom were in office at the time of the IPO, resigned.  They were accountant John Vergopoulos,  deputy chairman Robert Stubbs and Andrew Coxon, who was a De Beers career man, and it would be as well to remember these names in case they crop up anywhere else. During this recent fund raising Masoud and Manie had no help from them, nor from the fragrant Ms Chapman and Baret Communications 

In place of these doughty placemen we now have Joe Madungandaba as finance director. As he is joining from CI Holdings, the ultimate parent of Wheatfields which owns 25.6 per cent of Golden Falls, the subsidiary of Cape Diamonds  which operates the Elandslaagte diamond mine, it is strange that he did not step forward earlier.  After all it was apparently the tardiness in preparing financial results that caused all the problems in the first place. Joe is joined by Sharon Sasson, a male lawyer based in Israel who will be a non-executive director The  first of the two non-executives will be Anna  Mokgokong who is described as a ‘leading business lady, recognised as such by awards from around the  world, including the UK, Australia, France, Spain and Italy.’  How delightful, and for good measure she is co-founder and executive chairman of CI Holdings. Lastly in comes Oren Lubow, another lawyer from Israel. 

Mr Cofman-Nicoresti, the corporate finance man at WH Ireland’s office in Birmingham who changed his name  some time between the listing of Cape Diamonds and its share suspension, might give some thought as to whether any of these incomers is genuinely independent and therefore in a position to represent the long suffering shareholders. They have seen  their £13 million (£11.8 million net) disappear in a single year, judging by the new funding, and  the announcement about this gives no details on Golden Hope Ltd. And while we are on the subject of communication the AIM authorities might like to pick up on the fact that the last announcement on the company’s website as of this morning  is for a sale of a diamond last December. So Manie and Masoud have not bothered to keep shareholders informed even  while they continued to spend the company’s money. 

When the company originally listed it claimed that the Elandslaagte mine, which is just north of  Kimberley in the Northern Cape was already in production. The money was apparently being raised to extend the defined resources of these pipes, and install the processing capacity and infrastructure to support a higher rate of mining. Indeed  the latest operational update confirms that commercial production using the interim phase one crushing, screening and rotary pan plant began  on 1 October 2006.  This pan treated 413,725 tonnes  to produce 3,673 carats of diamonds. In late December 2,117 carats were sold for an average price of US$515/carat and  then another parcel was sold in April for only US$301/carat. It would be interesting to know the sizes of these diamonds as otherwise the information is pretty useless. The total funds raised from the sales amounted to US$1.5 million and doubtless analysts will be comparing  this performance with what was indicated in the prospectus. 

The excuse that crushing by the pan plant was restricted due to the hardness of the ore sounds pretty thin. Manie Silver is said to be an experienced diamond man and surely he knew about the ore before he started the operation. Shareholders will have a chance to quiz him about this at the Annual General Meeting which is due to be held at the Marriott Hotel in Grosvenor Square at 11 am on Thursday  26 July  2007. What they will also want to know is exactly how the money has been spent to date and what has been achieved. They will also want more information on the financing facility of £3.5 million arranged with the IDC of South Africa and the facility for £4 million arranged with  Empimex Diamonds, an Israeli diamond company.  For good measure they might ask if Messrs Sasson and Lubow have any connection with Empimex. 

It is bound to be a long and heated meeting, but before Masoud can bring it to a close he should also explain why shareholders are being asked to approve the issue of up to 10 million shares and 5 million warrants “ to facilitate,   when necessary, raising further finance by issue of shares.” This poor old cow has already been milked of a total of over £20 million including the financing facilities. If she cannot produce  adequate milk in the form of diamonds it might be better just to put her out to grass. Shareholders may not want to face this possibility but they should remember that one well known diamond analyst told Minews at the time of the listing that he was not happy with the  deposit at Elandslaagte. Makes you wonder why certain fund managers, who had access to this opinion at the time, still invested in the company. Doubtless all will be revealed in ‘Sex and Stupidity’.


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## drillinto (29 June 2007)

The East Asian financial crisis was 10 years ago.

Dani Rodrik's paper deals with the enduring costs of that crisis.

http://ksghome.harvard.edu/~drodrik/The Social Cost of Foreign Exchange Reserves.pdf


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## drillinto (5 July 2007)

Stick to OZ...


Political Risk: South Africa

By Our Risk Reporter from Risk Bureau
July 03, 2007
Source: www.minesite.com

South Africa is something of a paradox. On the one hand, it remains one of the most attractive investment environments in Africa. On the other, the country faces some daunting challenges, including organised and violent crime, profound social divisions which the controversial Black Economic Empowerment Act (2004) has sought to tackle but which is degenerating into a free ride for a privileged few. In fact, South Africa is going through a transition. After more than a decade in power, cracks are beginning to appear in the ANC’s governing coalition. How it handles these disputes will be a key test of the strength of South African democracy.

President Thabo Mbeki has been in office for more than seven years and has cultivated a reputation as a technocrat. Economic growth has often been impressive, a basic form of welfare state has been constructed, international investment has been encouraged. However, this moderate approach has never been popular with the ANC’s left wing and its allies. For all the government’s success in maintaining racial harmony and economic stability, there are still millions of South Africans who feel that the promises of the `rainbow nation’ have not been kept. As the Mbeki era draws to a close – a new ANC leader must be elected by the end of the year – these issues have begun to shape the debate over the country’s future. 

Looking at South Africa from the perspective of the foreign investor, it is useful to acknowledge that the country’s profound social divisions impacts on business. The post apartheid era promised much, but has yet to deliver. Large and medium sized businesses in the private sector remain largely controlled by Asians and Whites, to the frustration of many black politicians. Affirmative action legislation is often resented by white professionals, who feel unfairly disadvantaged. The use of the law to resolve racial inequalities, while understandable, creates other problems for investors. In January, the codes of good practice for black economic empowerment came into force. Under the new scheme, companies are assessed not just on black ownership, but also on the ethnic composition of managers and staff, the level of training they receive, whether they assist black entrepreneurs, and the amount they spend on social programmes and what part of their procurement goes to “empowered” suppliers. 

Firms are assessed on these criteria which are then used to grade them. Mining companies will be expected to meet empowerment targets if they are to retain their mining rights. Which explains why, in March, three Italian mining companies filed an international arbitration case against South Africa, arguing that the government’s positive racial discrimination laws were in violation of investment treaties with other countries. 

The finance minister has acknowledged the BEE’s shortcomings, which need to be reformed because it has led to abuses. Thus, traditionally white-run businesses have resorted to transferring stakes worth billions of rand to new black consortia; red tape has increased, and the policy has been seen as being advantageous to a select group of “oligarchs” with links to the ruling ANC. 

In June, the nationwide strike call by COSATU, which represents 60 per cent of the country’s public servants, highlighted the simmering tensions within the workforce, and its growing disaffection with the ruling ANC, once its `soulmate’ during the apartheid era. The great divided has been sparked by the union’s demand for a 12 per cent increase in wages, the government has offered 6 per cent, while an official body has recommended that President Mbeki should receive a 57 per cent pay rise! Equally, union leaders accuse the government of ignoring the workers and the poor while providing for foreign investors and the business community. 

Arguably, the most debilitating aspect of doing business in South Africa is the growing perception that crime is spiralling out of control. South Africa has one of the highest peacetime homicide rates in the world, comparable only with Jamaica and Brazil. The government and police are reluctant to comment, while President Mbeki continues to insist that it is merely a `perception’ that crime is out of control. Crime and the threat of crime impose a particularly heavy burden on business. Even if properties are not robbed or employees attacked, the expense involved in preventative security is considerable. 

While the catalogue of challenges is daunting, the announcement, in February, of South Africa’s first ever budget surplus, is encouraging. The finance minister informed parliament of a 0.3 per cent surplus in the 2006/07 tax year, with an anticipated rise to 0.6 per cent in 2007/08. Businesses can expect the phasing out of a secondary tax on companies. 

Forecast: Something of a paradox
South Africa’s progress has been impressive, yet the continued existence of profound social divisions within society, and the phenomenally high levels of crime take the shine off its achievements. Foreign investors find the bureaucracy galling while the BEE favours those with political clout. 

• Profound social divisions and high crime rates remain to be tackled
• Tensions between the moderate and radical wings of the government likely to come to a head


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## drillinto (29 July 2007)

There is no magic formula for forecasting equity crashes

By Tony Jackson / Financial Times / July 24 2007 

Even among those perennially sunny souls, the equity strategists, there is a touch of gloom around. The credit game is up, it seems, so the equity game cannot be far behind. It is only a question of time, and not much of it.

Yet the Dow went through 14,000 last week and the S&P 500 hit an all-time high. Granted, that is in depreciated dollars. But it still seems a funny way to express apprehension.

Let us look closer at what some of the strategists are saying. The most popular bearish argument comes from Morgan Stanley. In simple terms, it says equity markets tend to crack on average six months after credit markets do. This time round credit first weakened in February, so mind out for August.

For all I know, it might indeed work out that way. The trouble with the argument, though, is that no rationale is offered for how the mechanism works. We have only an average drawn from selected historic observations.

The markets have always been drawn to the magic of fixed periods, for reasons that elude me. Chartists are fond of the Kondratiev cycle that says depressions occur every 50 years. But Kondratiev’s theory was based on data from the 16th to 19th centuries. Why should the economy of the internet work to the same timetable as that of the oxcart?

Morgan Stanley points to the way credit spreads widened ahead of the crashes of 1987 and 2000. But today, credit and equities are more closely connected.

Credit and equity analysts sit alongside each other at the investment banks. Hedge funds routinely short a company’s equity while going long of its bonds, or vice versa. It is no longer a matter of two separate investment communities viewing the world differently. The same community is observing the two asset classes and drawing different conclusions.

Why? A possible – if familiar – explanation comes from one of the few bullish banks still around, Citigroup. In recent years, we have seen “one of the biggest arbitrage trades in financial market history” – the massive use of cheap debt to buy cheaper equity. The arbitrage gap still exists, so the bull market is intact.

Citigroup flourishes a chart showing the global earnings yield on equities and a notional global BBB bond yield. At the last market peak in 2000, the bond yield was nearly 9 per cent and the earnings yield only just over 3 per cent. No wonder, as Citigroup observes, that private equity didn’t join that particular party. The sums didn’t remotely add up.

At present, the yield on both has converged to about 6 per cent. This is not quite a steal any more, but is not that different from the conditions of the past two-and-a-half years. Citigroup hazards a guess that for the arbitrage train to be derailed, BBB bond yields might have to rise by two percentage points, or earnings yields fall by the same amount.

BBB bond yields have certainly been rising, through a combination of higher real yields and wider spreads. But 200 basis points is not on the cards quite yet. As for an earnings yield of 4, that would involve the price-earnings ratio rising from its present 17 or so to 25, which is a very bullish scenario.

So everything is all right, then? Well, not really. The price of money is only one factor in the equation. Another is liquidity – which, as they say, is only another name for risk.

And there are all kinds of tell-tale signs that lenders are becoming more risk-averse. In such times, the wall of money argument becomes meaningless – think of the Japanese equity market after the 1990 crash.

One other word of warning. Citigroup takes it as a bull point that, whereas in the last bull market, all the big acquisitions were for equity, today they are still predominantly for cash. But when trouble hits, that could be profoundly bearish in itself.

At the peak of the M&A cycle, companies inevitably overpay. Think of two examples last time, Vodafone and Marconi. The first used equity, the second debt. The first survived and the second was destroyed.

One of the props for the credit markets just now is the absence of corporate defaults. Just wait, though, till some of those big cash mergers start turning turn ugly. I distrust pat formulas for when the credit bust will hit equities. But I don’t doubt it will – eventually.


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## drillinto (29 July 2007)

Top U.S. Market Timing Newsletters Remain Bullish

http://www.marketwatch.com/news/sto...x?guid={6238A21C-9B93-423C-82C8-BEA920643430}


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## drillinto (31 July 2007)

BRE-X scandal (Canada) still stands out as a red flag for the mining industry

http://www.cbc.ca/money/story/2007/07/30/felderhof.html


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## drillinto (1 August 2007)

The trader who went to lunch and never came back

http://www.theglobeandmail.com/servlet/story/LAC.20070727.RAMARANTH27/TPStory/Business


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## drillinto (2 August 2007)

Credit markets leave banks saddled with £250bn of debt

http://business.timesonline.co.uk/t...ectors/banking_and_finance/article2182984.ece


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## drillinto (6 August 2007)

The Liquidity Puzzle

Robert J. Shiller
July 2007

We increasingly hear that “the world is awash with liquidity,” and that this justifies expecting asset prices to continue rising. But what does such liquidity mean, and is there really reason to expect that it will sustain further increases in stock and real estate prices? 

Liquid assets are assets that resemble cash, because they can easily be converted into cash and used to buy other assets. The idea seems to be that there are a lot of liquid assets lying around, and that they are being used to get money to bid up the prices of stocks, housing, land, art, etc. 

That theory sounds as general and fundamental as the theory that global warming is melting glaciers and raising sea levels around the world. Rising sea levels would explain a lot of geological and economic events. Is rising financial liquidity really a similar force? What is this theory anyway? 

Traditionally, “awash with liquidity” would suggest that the world’s central banks are expanding the money supply too much, causing too much money chasing too few goods. But if that were the problem, one would cause all prices – including, say, clothing and haircuts – to rise. That is what the Federal Reserve Chairman Arthur Burns meant when he said that the United States was “awash with liquidity” in 1971, a period when the concern was general inflation. 

But the recent popular use of the term “awash with liquidity” dates to 2005, a time when many central banks were tightening monetary policy. In the US, the Fed was sharply raising rates. Central banks worldwide clearly have been behaving quite responsibly with regard to general inflation since 2005. According to the IMF, world inflation, as measured by consumer price indices, has generally been declining since 2005, and has picked up only slightly in 2007. 

So it is something of a puzzle why people started using the term so much in 2005. It may have had something to do with the near-total lack of response of long-term interest rates to monetary tightening. If central banks are tightening and long-term rates aren’t rising, one needs some explanation. Liquidity is just a nice-sounding word to interpret this phenomenon. 

Another interpretation is that people are saving a great deal, and that all this money is chasing investment assets, bidding up prices. Current Fed Chairman Ben Bernanke raised this idea a few years ago, alleging a world “saving glut.” 

But, once again, the data do not bear this out. The IMF’s world saving rate has maintained a fairly consistent downward trend since the early 1970’s, and, while it has picked up since 2002, it is still well below the peak levels attained in the previous three decades. True, savings rates in emerging markets and oil-rich countries have been increasing since 1970, and especially in the last few years, but this has been offset by declining saving rates in advanced countries. 

Another interpretation is that “awash with liquidity” merely means that interest rates are low. But interest rates have been increasing around the world since 2003. Hardly anyone was saying the world was “awash with liquidity” in 2003. The use of the term has grown in parallel with rising , not falling, interest rates. 

Yet another theory is that changes in our ways of handling risk have reduced risk premia. The growth of the financial markets’ sophistication has allowed risks to be sliced and diced and spread further than ever before. Indeed, the much-vaunted market for collateralized debt obligations, which divides risks into tranches and places the different risk levels in different places according to the willingness to accept them, has plausibly played a role in boosting asset prices. But this is really a theory about risk management for certain kinds of products, not “liquidity” per se . 

Hyun Song Shin of Princeton University proposed a theory of excess liquidity in a paper with Tobias Adrian that he presented last month at the Bank for International Settlements in Brunnen, Switzerland. He says that it merely reflects a feedback mechanism that is always present: any initial upward shock to asset prices strengthens the balance sheets of financial institutions, so in response they borrow more and bid up prices even more. 

But if that is what the term “awash with liquidity” means, then its widespread use today is simply a reflection of the high asset prices that we already have. It could even be called an approximate synonym for “bubbly.” 

The term “awash with liquidity” was last in vogue just before the US stock market crash of October 19, 1987, the biggest one-day price drop in world history. The reasons for that crash are complex, but, as I discovered in my questionnaire survey a week later, it would appear that people ultimately did not trust the market’s level. As a result, they were interested in strategies – such as the portfolio insurance strategies that were popular at the time – that would allow them to exit the market fast. 

The term “awash with liquidity” was also used often in 1999 and 2000, just before the major peak in the stock market. So its popular use seems not to reflect anything we can put our finger on, but instead a general feeling that markets are bubbly and a lack of confidence in their levels. Under this interpretation, the term’s popularity is a source of concern: it may indicate a market psychology that could lead to downward volatility in prices. 


Robert J. Shiller is Professor of Economics at Yale University, Chief Economist at MacroMarkets LLC, which he co-founded (see macromarkets.com), and author of Irrational Exuberance and The New Financial Order: Risk in the 21st Century.

[Source: Project Syndicate]


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## drillinto (8 August 2007)

Mozambique (2007)

By Risk Reporter from Risk Bureau
www.minesite.com

Mozambique, among the fastest growing economies in Africa, has been drawing in foreign investors as it pushes ahead with what is commonly referred to as its mega-project model of development. Consequently, the last couple of years have been some of the most stable and prosperous in the country’s post-independence history.

Mozambique lacks the sizeable oil and diamond reserves that some other African countries are endowed with, but it does possess significant reserves of titanium and aluminium. As is now the accepted norm, China appears to be geared towards long-term investment in Mozambique; it has invested heavily in roads and its Export-Import Bank has contributed US$2.3billion towards construction of a new hydro-electric plant. Equally, India expects to acquire coal mines in Mozambique, to help it meet growing domestic demand from power plants. Further, Mozambique’s largest mining investment, Kenmare’s Moma titanium project is expected, in the first year of operation 2007 to produce total exports valued at US$58million rising to US$135million next year.

Nor are the Mozambiquean authorities ignoring the oil and gas potential, particularly in the under-developed Rovuma Basin which will be divided into seven blocks to attract the greatest possible number of companies. Already, US-based Anadarko Petroleum Corporation and Italy’s ENI have secured exploration and production rights to offshore Areas 1 and 4. Last month, three British companies signed contracts for oil and gas exploration in Sofala province. The government’s goal is: “to have a number of companies acquiring more concessions…”

Thus, in many ways, 2006 was a good year for Mozambique. The economy continued to grow rapidly, some analysts forecast GDP growth for the current year to reach 7.5 per cent, export revenues have climbed and political stability has been maintained. 

President Armando Guebuza has continued the work of the previous administration and Mozambique has indeed, made major strides away from its former status as a `post-conflict’ fragile state. Both the World Bank and the IMF have applauded his government’s pro-market, free trading approach to the economy which has created numerous new opportunities for foreign investors. Despite the applause, foreign business can expect to face some obstacles. Ironically, the emphasis on mega projects is part of the problem. Only huge multinationals have funds and government influence to push through new business ventures effectively. 

In late 2005, the governing Frelimo party set in train a series of reforms which aim to address this problem. Much of the Portuguese era legislation which still governs business is to be overhauled and replaced with an IMF-approved laissez-faire regime. The paperwork involved in setting up new businesses is expected to be drastically reduced. Other measures, also backed by international bodies like the World Bank, are being passed to ensure greater accountability in government spending. 

The Guebuza regime has also managed to maintain political stability. Given that Frelimo and the main opposition Renamo party fought one another for the best part of a decade, relations between the two are remarkably cordial. Renamo has acknowledged that it receives mostly fair coverage from state controlled radio and television stations. Opposition politicians are mostly able to criticise the government without fear of arrest, and democratic procedures are mostly observed in parliament. Although allegations of vote rigging were made after Guebuza’s election, international observers concluded that they were not serious enough to change the result. 

Even so, it is worth remarking that the need to appease former enemies and maintain stability has hampered efforts to fight corruption. The legacy of Mozambique’s civil war is relevant here. Official anti-corruption campaigns are often used to exert political pressure on opponents, and have a poor reputation for impartiality. Mr Guebuza made combating corruption one of the key aims of his last election campaign, regardless of the fact that his time in office has allowed him to become one of the country’s richest businessmen. 

These then are issues for any foreign investment in Mozambique. While it applauds the country’s achievements thus far, the World Bank has named corruption and bureaucracy as two of the key obstacles to development and progress in Mozambique. Ironically, it is the mega-project model that raises concerns over Mozambique’s longer-term future. While highly rewarding in the short term, it has a poor long term pedigree. An economy dominated by a few multinational corporations and government agencies is uniquely vulnerable to corruption. Mega-projects are also socially and politically corrosive. Relative to the revenue they generate, they are not labour intensive. The Mozal plant was responsible for more than half Mozambique’s 2005 GDP growth, but employs a little under 1,000 people. 

Forecast = Looking good
A buoyant economy and a stable democracy all make Mozambique an appealing prospect for investment. While it is foolhardy to crystal ball gaze, the current administration is moderate in tone and is expected to stay that way.

Bullet Points:

•    Good governance and booming economy encourage investors
•    Corruption and bureaucracy remain problematic


[Note - A few OZ companies are already present in Mozambique: BHP Billiton, Riversdale Mining(RIV/coal), Mavuzi Resources(MAV/gold), Mamba Minerals(MAB/gold)]


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## drillinto (9 August 2007)

A must read economic commentary by Brian Wesbury(top US inflation hawk):

http://www.ftportfolios.com/Comment...The_Greenspan_Put_is_Dead:_Long_Live_Bernanke


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## drillinto (10 August 2007)

Greg Ip(WSJ) compares the recent convulsions in credit markets with those of 1998.

http://blogs.wsj.com/economics/2007/08/08/2007-vs-1998-better-in-most-ways-worse-in-some/


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## drillinto (15 August 2007)

Terrific list of FAQ about the recent FED actions to shore up liquidity

http://www.voxeu.com/index.php?q=node/460


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## drillinto (17 August 2007)

10% Corrections

http://bespokeinvest.typepad.com/bespoke/2007/08/10-corrections-.html


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## drillinto (18 August 2007)

What's behind the market turmoil 

By Evan Davis 
Economics editor, BBC News  
August 17, 2007


It's taken for granted in most of the coverage of the current market troubles, that sub-prime problems in the US mortgage market, are causing declines in world share prices. But why are they having such a widespread effect? 
The best guess is that there are a potential $100bn (£50bn) worth of sub-prime mortgage defaults, from less than credit-worthy borrowers, mainly in the US. 

So why was $120bn (£60bn) wiped off shares in London alone on Thursday? 

The reason must be that there are deeper links between sub-prime lending and equities. 


Banking sector losses 

First, there are some sub-prime losses among banks (or the people to whom they've lent), and banks are listed on the stock markets. 

So banks may be worth less than we thought last year. 

And it only adds to the problem that we don't know which banks have sub-prime losses, and the banks themselves may not even be sure. 

But the second and more important problem for shares is not caused by banks, but hedge funds. 

Hedge fund calls 

They have typically borrowed money to invest (and they've often borrowed shares and other securities too). 

But terms and conditions apply to their loans: lenders tell the hedge funds the debt must not rise above a specified proportion of the total fund. 

It would be like your bank telling you that your mortgage can't rise above 90% of the value of your house. 

Now what would happen if the value of your house fell? 

You would have to find some cash to repay some of the mortgage to ensure it was still not above 90% of the new lower value. 

Forced sales 

Hedge funds are in that predicament now. 


The losses they've endured on some investments trigger the need to repay cash to prevent their loans breaching their terms. 

One way for hedge funds to find cash is to sell shares. 

Note that this does not mean the hedge funds are insolvent - they just need cash, and the easiest way to find it is to sell shares, pushing down the prices. 

This potentially could be a bit perverse, with the market getting into a vicious circle of falling prices, cash requirements and more falling prices. 

If this was the only reason shares were falling, it would probably mean it was a good time to buy them. 

But our list of reasons for shares to fall is by no means complete yet. 

Lending dries up 

The third link is that all kinds of bank lending have been affected by the failure of the sub-prime market. 

This is because the whole market in second-hand debt has been paralysed by the sub-prime problems, with traders barely able to value the IOUs in which they have stakes. 

This affects the banks, who are sitting on debt they'd like to sell on, but can't. And it affects corporate borrowers, particularly the kind of borrowers who have been using debt to finance highly-leveraged takeovers. 

Those takeovers have helped prop up the stock market, and if they now evaporate, the stock market will probably fall. 


The real economy 

Finally, the tightening of credit conditions in the US housing market and beyond may have real economic effects that depress corporate profits. 


The world has been very dependent on US consumer spending. 

If that diminishes as the housing market and stock markets dive, then companies are in a pickle, the world over. 

It explains why the mining stocks have been among the biggest fallers - if the world economy slows, we won't be needing so much of the stuff they get out of the ground. 

The end of the cycle 

That's the list of connections between sub-prime and equities. 

But there are other things going on in equities too. 

Most notably, corporate profits are at a high level; and that might be a sign we are at the peak of a cycle and tougher times are ahead. 

We could have surmised this some weeks ago, but other market events might have concentrated minds on it. 

Will equities fall further? 

Well, I'm afraid the one thing lacking from the arguments here are any numbers. 

We might identify the broad issue, but what the traders have to do is to calibrate them and put a price on them all. 

What stock markets are going through at the moment means they are struggling to do just that.


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## drillinto (20 August 2007)

A timeout to assess uncertainty

Amy Brinkley 
Chief risk officer, Bank of America
Source: CNN, 19 August 2007

There's no question that the risk of a slowdown has increased due to the hit to business confidence and the wider credit spreads. Also, consumers' reduced ability to get credit could impact spending. There will continue to be pain in both the subprime mortgage and the leveraged loan markets. In the leveraged loan market, unlike the subprime market, the credit fundamentals haven't changed. But there's an oversupply of new issues--$237 billion worth of leveraged loans in the pipeline. They will have to work through the system before we have equilibrium.

We knew these corrections would come. The surprise is the degree of volatility and the effect on liquidity, especially short-term liquidity. The very substantial changes in the financial markets over the past five years have presented new challenges. We have new players: foreign investors, hedge funds, and private equity firms. And we have new products--more complex products than in the past. The changes do distribute risk more broadly, but they've contributed to the uncertainty. Getting a handle on where the risk is isn't as easy as it used to be when banks made loans that defaulted when they were bad. These more complex products are less transparent, so it's difficult to determine the value. And the hedge funds are less transparent. The uncertainty creates a higher level of risk aversion. That, in turn, creates liquidity risk. People want to sit on the sidelines until they think they have it all figured out.

Where does it go from here? The longer there's risk aversion, the greater the impact on the markets. The oversupply of leveraged loans will take a few months to go through the system. The subprime issues will continue to be problematic through 2008. But these are healthy corrections for the long term. We don't see broad signs of weakness in the economy, and that's what matters most. Global economic growth is expected to remain strong. The U.S. economy continues to be sound. One of the most important indicators is low unemployment, at 4.6%. We're seeing steady gains in personal income. There's a continued acceleration in exports. And corporate balance sheets are strong.


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## drillinto (21 August 2007)

Market Risk - The Detrimental Nature of the Herd Mentality

Author: Lenny Broytman
August 20, 2007

Sophisticated technology aimed at properly assessing risk associated with trading asset-backed securities are essential for any of today’s large banks but according to experts, this much-needed technology could also be backfiring all the same. 

Sophisticated technology aimed at properly assessing risk associated with trading asset-backed securities are essential for any of today’s large banks but according to experts, this much-needed technology could also be backfiring. 

According to reuters.cok.uk., some of these systems have added fuel to the fire that is the liquidity crisis surrounding the subprime situation when investors hurried to sell at the very first sign of trouble. When the mortgage collapse in the US spread across numerous asset classes, banks quickly ceased lending to one another in a move that Reuters says, no risk management model ever saw coming. 


"These risk management systems create risk," Avinash Persaud, Chairman of Intelligence Capital Ltd, a risk consultancy. "If you give investors the same set of data they end up with a similar portfolio, so when volatility rises they all end up having to sell the portfolio," Persaud added. 

According to one Frankfurt-based analyst close to the investment banking sector, one-day Value at Risk valuations, which are used by both banks and investors alike to measure how far the value of a portfolio may and/or can fall in a single day, just don’t work in these kinds of situations. 

Risk management models are essential. They assess risk as they should. They monitor future situations with a fair amount of accuracy investors value. But all of these things can only go so far. According to many, these risk models can also spark a herd mentality that can lead to market patterns that are unnecessary and oftentimes, stem from fear. 

Many financial experts agree that these tools can only be utilized properly if and when the data they are fed into is accurate. Furthermore, investor follow-thru has to be a little bit more than just the natural, one-size-fits-all solution that everyone else in the market is going to resort to. 

"Trading models have been calibrated for stable market conditions and cheap money," said a consultant at a financial audit firm in London. "The game was: 'let's not get caught when the music stops.'" 

Experts note that the ailing credit market is not the only source of fear for investors. 

"Models have correlation elements built in and in theory certain assets should not be correlated," said the consultant. "When there is a general panic, everything gets correlated," said the London-based consultant. 

It is for many of these reasons that the larger banks are not relying as much on these risk management models as their less-experienced counterparts are. A lot of these experienced banks understand the concept of fear-driven short-term investors ruining portfolios by dumping assets in a wild stampede. 

"You have a mentality that the (risk management) model gives you some sort of control but you also have banks that combine these models with the experience of analysts and a distinct risk management culture," said Michael Dawson-Kropf at credit risk agency DBRS. 


"I would suspect that more people saw this (crisis) coming than are prepared to admit it, but the nature of the beast is you don't know when it is coming and if you quit too early you may be fired for it," the Frankfurt-based analyst added.

"People must ask not what happens to a portfolio if there is a repeat of the Asian crisis but what happens to a portfolio if I am part of a herd," said Persaud. 


Source:   www.riskcenter.com


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## drillinto (25 August 2007)

Visit  http://icf.som.yale.edu/confidence.index/CrashIndex.shtml for other Confidence Indexes by Robert J. Shiller / Yale University / USA


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## drillinto (27 August 2007)

Must read by James Grant
****************

The Fed’s Subprime Solution 

JAMES GRANT
New York Times, August 26, 2007

THE subprime mortgage crisis of 2007 is, in fact, a credit crisis ”” a worldwide disruption in lending and borrowing. It is only the latest in a long succession of such disturbances. Who’s to blame? The human race, first and foremost. Well-intended public policy, second. And Wall Street, third ”” if only for taking what generations of policy makers have so unwisely handed it. 

Possibly, one lender and one borrower could do business together without harm to themselves or to the economy around them. But masses of lenders and borrowers invariably seem to come to grief, as they have today ”” not only in mortgages but also in a variety of other debt instruments. First, they overdo it until the signs of excess become too obvious to ignore. Then, with contrite and fearful hearts, they proceed to underdo it. Such is the “credit cycle,” the eternal migration of lenders and borrowers between the extreme points of accommodation and stringency. 

Significantly, such cycles have occurred in every institutional, monetary and regulatory setting. No need for a central bank, or for newfangled mortgage securities, or for the proliferation of hedge funds to foment a panic ”” there have been plenty of dislocations without any of the modern-day improvements.

Late in the 1880s, long before the institution of the Federal Reserve, Eastern savers and Western borrowers teamed up to inflate the value of cropland in the Great Plains. Gimmicky mortgages ”” pay interest and only interest for the first two years! ”” and loose talk of a new era in rainfall beguiled the borrowers. High yields on Western mortgages enticed the lenders. But the climate of Kansas and Nebraska reverted to parched, and the drought-stricken debtors trudged back East or to the West Coast in wagons emblazoned, “In God we trusted, in Kansas we busted.” To the creditors went the farms. 

Every crackup is the same, yet every one is different. Today’s troubles are unusual not because the losses have been felt so far from the corner of Broad and Wall, or because our lenders are unprecedentedly reckless. The panics of the second half of the 19th century were trans-Atlantic affairs, while the debt abuses of the 1920s anticipated the most dubious lending practices of 2006. Our crisis will go down in history for different reasons. 

One is the sheer size of the debt in which people have belatedly lost faith. The issuance of one kind of mortgage-backed structure ”” collateralized debt obligations ”” alone runs to $1 trillion. The shocking fragility of recently issued debt is another singular feature of the 2007 downturn ”” alarming numbers of defaults despite high employment and reasonably strong economic growth. Hundreds of billions of dollars of mortgage-backed securities would, by now, have had to be recalled if Wall Street did business as Detroit does.

Benjamin Graham and David L. Dodd, in the 1940 edition of their seminal volume “Security Analysis,” held that the acid test of a bond or a mortgage issuer is its ability to discharge its financial obligations “under conditions of depression rather than prosperity.” Today’s mortgage market can’t seem to weather prosperity. 

A third remarkable aspect of the summer’s troubles is the speed with which the world’s central banks have felt it necessary to intervene. Bear in mind that when the Federal Reserve cut its discount rate on Aug. 17 ”” a move intended to restore confidence and restart the machinery of lending and borrowing ”” the Dow Jones industrial average had fallen just 8.25 percent from its record high. The Fed has so far refused to reduce the federal funds rate, the main interest rate it fixes, but it has all but begged the banks to avail themselves of the dollars they need through the slightly unconventional means of borrowing at the discount window ”” that is, from the Fed itself. 

What could account for the weakness of our credit markets? Why does the Fed feel the need to intervene at the drop of a market? The reasons have to do with an idea set firmly in place in the 1930s and expanded at every crisis up to the present. This is the notion that, while the risks inherent in the business of lending and borrowing should be finally borne by the public, the profits of that line of work should mainly accrue to the lenders and borrowers. 

It has not been lost on our Wall Street titans that the government is the reliable first responder to scenes of financial distress, or that there will always be enough paper dollars to go around to assist the very largest financial institutions. In the aftermath of the failure of Long-Term Capital Management, the genius-directed hedge fund that came a cropper in 1998, the Fed ”” under Alan Greenspan ”” delivered three quick reductions in the federal funds rate. Thus fortified, lenders and borrowers, speculators and investors, resumed their manic buying of technology stocks. That bubble burst in March 2000. 

Understandably, it’s only the selling kind of panic to which the government dispatches its rescue apparatus. Few object to riots on the upside. But bull markets, too, go to extremes. People get carried away, prices go too high and economic resources go where they shouldn’t. Bear markets are nature’s way of returning to the rule of reason. 

But the regulatory history of the past decade is the story of governmental encroachment on the bears’ habitat. Under Mr. Greenspan, the Fed set its face against falling prices everywhere. As it intervened to save the financial markets in 1998, so it printed money in 2002 and 2003 to rescue the economy. From what? From the peril of everyday lower prices ”” “deflation,” the economists styled it. In this mission, at least, the Fed succeeded. Prices, especially housing prices, soared. Knowing that the Fed would do its best to engineer rising prices, people responded rationally. They borrowed lots of money at the Fed’s ultralow interest rates. 

Now comes the bill for that binge and, with it, cries for even greater federal oversight and protection. Ben S. Bernanke, Mr. Greenspan’s successor at the Fed (and his loyal supporter during the antideflation hysteria), is said to be resisting the demand for broadly lower interest rates. Maybe he is seeing the light that capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich. 

In any case, to all of us, rich and poor alike, the Fed owes a pledge that it will do what it can and not do what it can’t. High on the list of things that no human agency can, or should, attempt is manipulating prices to achieve a more stable and prosperous economy. Jiggling its interest rate, the Fed can impose the appearance of stability today, but only at the cost of instability tomorrow. By the looks of things, tomorrow is upon us already. 

A century ago, on the eve of the Panic of 1907, the president of the National City Bank of New York, James Stillman, prepared for the troubles he saw coming. “If by able and judicious management,” he briefed his staff, “we have money to help our dealers when trust companies have [failed], we will have all the business we want for many years.” The panic came and his bank, today called Citigroup, emerged more profitable than ever. 

Last month, Stillman’s corporate descendant, Chuck Prince, chief executive of Citigroup, dismissed fears about an early end to the postmillennial debt frolics. “When the music stops,” he told The Financial Times, “in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and danceWe’re still dancing.” 

What a difference a century makes. 


James Grant, the editor of Grant’s Interest Rate Observer, is the author of “Money of the Mind.”


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## drillinto (23 September 2007)

The average total compensation of risk managers in the US

:::::::::::::::::::::::

Masters of Risky Universe
Specialist Executives Gaining Prominence Amid Market Jitters
By RENÃ‰E SCHULTES / WSJ
September 21, 2007

The temporary closure of three funds managed by BNP Paribas Asset Management over a squeeze in liquidity last month left a lasting impression in the risk-management community. At few times in the past five years has the role of the risk manager been as important as it was during the summer when bond and equity markets swung wildly.

Such volatile trading conditions have forced chief executives to demand daily and weekly updates of the market risk in their portfolios to help avoid situations like that at BNP Paribas, which was forced to suspend fund redemptions because it would have meant selling assets at severely depressed prices.

But the evolution of this risk-manager role started well before the summer. Since the late 1990s, several firms have appointed chief risk officers, who oversee all operational and investment risk with many also sitting on the executive committee.

FMR Corp.'s Fidelity Investments, the U.S. mutual-fund manager, was among the first to do this in 1995 when James Lam joined as chief risk officer to develop a risk-management function across the company. He left in 1998 and now runs James Lam & Associates, a specialist risk-management consultancy.

Fidelity declined to comment on how it manages the role today, but said: "While security concerns preclude us from discussing specific issues or practices in detail, we can tell you that we employ robust risk-management measures and invest aggressively in security. We employ extensive physical, electronic and procedural controls, which we regularly monitor and adapt to respond to changing requirements and advances in technology."

Other buy-side houses have followed in Fidelity's footsteps. Kenneth Winston, global chief risk officer for Morgan Stanley Investment Management, is responsible for operational and investment risk management. "One of the key principles of the role is independence, so where possible, the risk manager should have the ability to render independent views. That's an important part of the reporting line," Mr. Winston said.

Mike Woodward, president of executive-search firm Risk Talent Associates, said: "The chief risk officer has moved into the executive suite. Boards want an independent oversight of the risk...someone who wakes up every morning thinking about risk."

Mr. Woodward said he believes banks and fund-management companies could look to the risk-manager function as the precursor to becoming chief executive. He said: "Traditionally people have gone from chief financial officer to chief executive. As the chief risk officer, you get your fingers dirty. I think we will start to see some firms rotate people through that function who are on the chief executive track."

As the demands of the risk-manager role have grown, so too have salary levels. "As these buy-side firms build more and more nontraditional strategies, the risks are much more significant," Mr. Woodward said. "They are going to need to build more talent around risk management that is more typical of the sell side. That's going to put pressure on compensation and the market. There's a shortage of professionals and as Asia develops it will draw talent from the U.S and U.K."

As the 2007 Risk Talent Associates Professional Compensation Survey shows, compensation for risk specialists in asset management is growing, rising an average of 17% last year from a year earlier. Salaries increased an average of 6%, while cash bonuses and noncash bonuses increased 27%.

Total compensation for a chief risk officer at a traditional asset-management firm was $837,000 last year and $1.3 million for the same role at a hedge fund, according to the survey.

However, others believe transforming the risk manager into an executive function is a step too far.

Hendrik du Toit, chief executive of Investec Asset Management, said: "We would be cautious about having a distant chief risk officer who just looks at processes. We want someone on the ground and getting his hands dirty because what is the difference between that high and far-removed chief risk officer and the audit committee? They are almost the same. Our audit committee, which is chaired by nonexecutives, asks all those questions and satisfies itself with the process. We don't think you need another individual doing that, but rather someone who deeply understands the investment process."


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## drillinto (26 September 2007)

How bad debt infected the world

http://www.telegraph.co.uk/money/ma...VCBQYIV0?xml=/money/2007/09/16/ccredit116.xml


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## drillinto (18 October 2007)

Inflation Higher? Count Your Blessings, Mr. Bernanke
By Greg Ip -- WSJ; 17 OCT 2007

Consumer prices rose 0.27% in September from August, an annual rate of 3.2% - after an annualized drop of 1.7% in August, the Labor Department reported. Stripping out energy and food, core inflation rose to an annualized 2.7% from 1.8%. “Consumer inflation is not yet rolling over and playing dead,” warned Wells Fargo in a research note. 

Still, a glance at figures released the same day for Zimbabwe offer some perspective. Inflation there hit an annualized 7,982.1% in September, up from 6,592.8% in August, Reuters reports, quoting the government’s Central Statistical Office. Despite the admirable precision of that inflation rate, “Experts estimate it is actually much higher,” the news agency says. 

How did local traders react to the news? “The [inflation] figures don’t matter, what matters is to stay alive and that’s what we are trying to do here,” one foreign currency trader told the agency. Police have been trying to drive black-market currency traders off the streets.


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## drillinto (29 October 2007)

A Catastrophe Foretold 
By PAUL KRUGMAN | NY Times | October 26, 2007

“Increased subprime lending has been associated with higher levels of delinquency, foreclosure and, in some cases, abusive lending practices.” So declared Edward M. Gramlich, a Federal Reserve official. 

These days a lot of people are saying things like that about subprime loans ”” mortgages issued to buyers who don’t meet the normal financial criteria for a home loan. But here’s the thing: Mr. Gramlich said those words in May 2004.

And it wasn’t his first warning. In his last book, Mr. Gramlich, who recently died of cancer, revealed that he tried to get Alan Greenspan to increase oversight of subprime lending as early as 2000, but got nowhere.

So why was nothing done to avert the subprime fiasco?

Before I try to answer that question, there are a few things you should know.

First, the situation for both borrowers and investors looks increasingly dire. 

A new report from Congress’s Joint Economic Committee predicts that there will be two million foreclosures on subprime mortgages by the end of next year. That’s two million American families facing the humiliation and financial pain of losing their homes.

At the same time, investors who bought assets backed by subprime loans are continuing to suffer severe losses. Everything suggests that there will be many more stories like that of Merrill Lynch, which has just announced an $8.4 billion write-down because of bad loans ”” $3 billion more than it had announced just a few weeks earlier.

Second, much if not most of the subprime lending that is now going so catastrophically bad took place after it was clear to many of us that there was a serious housing bubble, and after people like Mr. Gramlich had issued public warnings about the subprime situation. As late as 2003, subprime loans accounted for only 8.5 percent of the value of mortgages issued in this country. In 2005 and 2006, the peak years of the housing bubble, subprime was 20 percent of the total ”” and the delinquency rates on recent subprime loans are much higher than those on older loans.

So, once again, why was nothing done to head off this disaster? The answer is ideology.

In a paper presented just before his death, Mr. Gramlich wrote that “the subprime market was the Wild West. Over half the mortgage loans were made by independent lenders without any federal supervision.” What he didn’t mention was that this was the way the laissez-faire ideologues ruling Washington ”” a group that very much included Mr. Greenspan ”” wanted it. They were and are men who believe that government is always the problem, never the solution, that regulation is always a bad thing. 

Unfortunately, assertions that unregulated financial markets would take care of themselves have proved as wrong as claims that deregulation would reduce electricity prices.

As Barney Frank, the chairman of the House Financial Services Committee, put it in a recent op-ed article in The Boston Globe, the surge of subprime lending was a sort of “natural experiment” testing the theories of those who favor radical deregulation of financial markets. And the lessons, as Mr. Frank said, are clear: “To the extent that the system did work, it is because of prudential regulation and oversight. Where it was absent, the result was tragedy.”

In fact, both borrowers and investors got scammed.

I’ve written before about the way investors in securities backed by subprime loans were assured that they were buying AAA assets, only to suddenly find that what they really owned were junk bonds. This shock has produced a crisis of confidence in financial markets, which poses a serious threat to the economy.

But the greater tragedy is the one facing borrowers who were offered what they were told were good deals, only to find themselves in a debt trap.

In his final paper, Mr. Gramlich stressed the extent to which unregulated lending is prone to the “abusive lending practices” he mentioned in his 2004 warning. The fact is that many borrowers are ill-equipped to make judgments about “exotic” loans, like subprime loans that offer a low initial “teaser” rate that suddenly jumps after two years, and that include prepayment penalties preventing the borrowers from undoing their mistakes. 

Yet such loans were primarily offered to those least able to evaluate them. “Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked. “The question answers itself ”” the least sophisticated borrowers are probably duped into taking these products.” And “the predictable result was carnage.”

Mr. Frank is now trying to push through legislation that extends moderate regulation to the subprime market. Despite the scale of the disaster, he’s facing an uphill fight: money still talks in Washington, and the mortgage industry is a huge source of campaign finance. But maybe the subprime catastrophe will be enough to remind us why financial regulation was introduced in the first place.


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## drillinto (10 November 2007)

The sky has already fallen

http://blogs.telegraph.co.uk/business/ambrosevanspritchard/oct07/skyhasfallen.htm


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## drillinto (22 November 2007)

Stick to OZ !

http://www.theaustralian.news.com.au/story/0,25197,22796145-5005200,00.html


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## drillinto (1 December 2007)

The New York Times  |  November 18, 2007
Economic View

Crazy Little Thing Called Risk 
By PETER L. BERNSTEIN

BACK when I was managing other people’s money, I had a client, a doctor, who enjoyed giving away money to his daughters. He was lucky, because an extended bull market was under way with only minor interruptions. The more he gave away, the more the market replaced what he had parted with. As generosity appeared to be a cost-free form of recreation, he considered the whole thing a riskless enterprise.

Whenever I saw my client, he immediately thanked me for making him whole after his most recent spate of giving. I always had to remind him that his gratitude was misplaced. Don’t thank me, I warned him. Thank all those nice people who are willing to pay higher prices today for the stocks you bought earlier at lower prices.

This client, who assumed that the steady multiplication of his money would continue indefinitely, without risk, keeps popping up in my memory. Although this episode happened back in the 1950s, it contains a deep truth worth exploring now, because his experience gets to the roots of what investment risk is all about.

A naÃ¯ve approach to risk might have been appropriate in an era when economic activity was almost totally agricultural. For most of human history, in fact, the main source of economic risk was the weather. But nobody can do anything about the weather. Risk management in those days was therefore a matter of religion, incantation or superstition. Rain dances in one area were matched by novenas in another. Appeals to God’s will or the fates seemed to be the only way to deal with the risks that weather could wreak.

That model of risk management changed radically during the Industrial Revolution. As more and different kinds of goods and services came to market, a wide variety of risks replaced the longstanding and single-minded concerns about the weather. What will our suppliers charge? Will customers pay the prices we set? Will they want the new products we are developing? Will our competitors beat us to the punch? Will they start a price war? Should we raise our employees’ wages, and, if so, by how much? Can the engineers rearrange our production to be more efficient? Will our bankers smile or frown when we seek credit? Will our interest rates rise or fall? 

Today, risk has shifted from a bet on what nature will provide to an intricate series of bets on what other players in the economy will decide ”” and how each will respond to the others’ decisions. Instead of a throw of the dice, economic activity has become an intense interchange among companies, employees, suppliers, customers, owners, borrowers, lenders and financiers. The interaction has become more complex over time, so the answers to the above questions will in turn provoke new questions, answers and decisions among these groups. 

Most important, the essence of risk itself has been fundamentally transformed. Risk today depends upon the consequences of what somebody else will do, not on what God or nature will provide. Risk management means protecting oneself from the adverse and unexpected decisions others may make and, in the process, making better decisions than they do. John von Neumann, who developed game theory, referred to these interactive patterns of decision-making as the sphere of combat and competition. 

My client acted as if his portfolio was immune from others’ adverse choices. He wasn’t alone in that thinking then, and he wouldn’t be alone now. A look at recent events shows that many investors are following in his footsteps. Three months ago, for example, subprime paper was an investment rated Aaa for most investors, which meant they believed they were virtually certain of receiving the return they expected. But then homeowners began to default on their subprime mortgages, and suddenly, the paper was risky, because other investors were making adverse decisions. People who wanted to sell their homes found that prospective buyers were offering much less, and homeownership was suddenly transformed from riskless to risky.

In recent weeks, chief executives have departed from leading financial institutions like Citigroup and Merrill Lynch. Such institutions have hit the headlines for the magnitude of their losses, which occurred because other investors wanted to pay lower prices for the exotic financial assets the banks had been so comfortable holding. Those assets appeared risky. And then investors reduced the prices they would pay for all types of financial assets that they feared had become too risky to attract buyers. And so on down the line.

It is not the market that is rising or falling at any moment, even if we commonly speak as though it were. In truth, prices move in response to the buying and selling decisions of countless investors, who are constantly considering the likely decisions of countless others. Incantation may still go on ”” for example, “In the long run, stocks will always go up” ”” but it may not change the decisions of other investors. 

In the 1950s, those other investors made my doctor-client happy. Today, he would have no reason to thank them or me. 


Peter L. Bernstein, a financial consultant and economic historian, is the editor of the Economics & Portfolio Strategy newsletter.


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## drillinto (16 January 2008)

Bank writedowns set to exceed $112bn

Dawn Cowie
Financial News Online US
15 Jan 2008 

Writedowns by banks look set for a further increase as JP Morgan, Citigroup and Merrill Lynch this week publish fourth-quarter results. They are predicted to add to the $78.5bn (â‚¬53.2bn) total recorded since November.

 Goldman Sachs analysts William Tanona, Betsy Miller and Neil Sanyal predict the three US banks will notch up combined fourth-quarter writedowns of $33.6bn. That would boost the total to $112.1bn. The analysts said in research last month the figures are “likely to be significantly larger than investors are anticipating”.

Citigroup, which tops the table of writedowns, is expected to declare a further $18.7bn of writedowns in relation to collateralised debt obligations when it publishes its results tomorrow, taking its total writedowns to $33.3bn.

Goldman’s analysts estimate Citigroup would be exposed to about $25bn in CDOs after the next writedown so it needs to preserve capital and raise fresh finance. The researchers predict Citigroup will raise $5bn to $10bn and cut its dividend by 40% this year.

JP Morgan will publish results on Wednesday, having reported writedowns of $1.6bn. It is expected to announce a further $3.4bn writedown, which would leave it with $5bn exposure to CDOs. The bank, which last week hired former British Prime Minster Tony Blair as a senior adviser, avoided the worst of the US credit problems last year, having steered clear of structured investment vehicles and mortgage-backed investments.

Merrill Lynch is also due to report fourth-quarter results this week and is expected to announce a $15bn writedown, according to a New York Times report that cited people briefed on the plan. That will take its tally to $22.9bn, leapfrogging Morgan Stanley and UBS into second position in the league table of writedowns. Goldman’s analysts estimated that Merrill would make a $11.5bn writedown and said the bank would be exposed to about $8bn in CDOs.

Merrill Lynch and Citigroup are also set to announce further capital injections from sovereign wealth funds to compensate for mortgage losses, having raised a combined total of $14bn at the end of last year.


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## drillinto (26 February 2008)

Award for Fraud of the Year

http://blogs.telegraph.co.uk/business/marketforces/january2008/andtheawardforfraudoftheyear.htm


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## drillinto (5 March 2008)

The asset write down and credit loss league table

http://news.hereisthecity.com/news/business_news/7612.cntns


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## drillinto (8 March 2008)

An interesting risk tracker for all countries

http://www.viewswire.com/site_info.asp?info_name=RB_risktracker&page=rk&page_title=Risk Tracker&rf=0


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## ozambersand (8 March 2008)

These posts have some very interesting reading in retrospect drillinto. Thanks for collecting them together. No-one can say we haven't been warned!

Starting from the article by Tony Jackson / Financial Times / July 24 2007 who provided a warning about the link between the credit market and equity market saying it was just a matter of "when" (in this case about 20 days to last August's drop!).

Then the article on August 17 by By Evan Davis Economics editor, BBC News 
which describes how the hedge funds can add to the problem.....:

However, this article by Amy Brinkley Chief risk officer, Bank of America Source: CNN, 19 August 2007 caused me concern.



> We knew these corrections would come. The surprise is the degree of volatility and the effect on liquidity, especially short-term liquidity. The very substantial changes in the financial markets over the past five years have presented new challenges. We have new players: foreign investors, hedge funds, and private equity firms. And we have new products--more complex products than in the past. The changes do distribute risk more broadly, but they've contributed to the uncertainty. Getting a handle on where the risk is isn't as easy as it used to be when banks made loans that defaulted when they were bad. These more complex products are less transparent, so it's difficult to determine the value. And the hedge funds are less transparent. The uncertainty creates a higher level of risk aversion. That, in turn, creates liquidity risk. People want to sit on the sidelines until they think they have it all figured out.
> 
> Where does it go from here? The longer there's risk aversion, the greater the impact on the markets. The oversupply of leveraged loans will take a few months to go through the system. The subprime issues will continue to be problematic through 2008. But these are healthy corrections for the long term. We don't see broad signs of weakness in the economy, and that's what matters most. Global economic growth is expected to remain strong. The U.S. economy continues to be sound. One of the most important indicators is low unemployment, at 4.6%. We're seeing steady gains in personal income. There's a continued acceleration in exports. And corporate balance sheets are strong.




The problem with this is that the claims made in the last paragraph seem to becoming unravelled. So where do we go from here?.................


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## drillinto (29 March 2008)

Stick to OZ !

 ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤ ¤

Political Risk Analysis: Democratic Republic of Congo

By Our Risk Reporter from Risk Bureau
www.minesite.com
March 28, 2008

There is no point pretending that doing business in the phenomenally resource-rich Democratic Republic of Congo will get easy any time soon. The political complexities of the country tend to defeat even the most optimistic well wisher. Joseph Kabila was voted in as president of the DRC in November 2006, in the country’s first multiparty elections for 40 years. However, the veneer of democracy belies the truth.
The Democratic Republic of Congo is a poor country, divided along ethnic and geographical lines, and has been oppressed for decades by home-grown dictators and neighbours coveting its immense mineral wealth. On 23rd January, the warring rebels and militias in the east signed a ceasefire deal, which it is hoped will bring a halt to one of Africa’s deadliest conflicts, at its height between 1998 and 2003. But despite the formal end of the country’s war, warring parties in the country’s eastern borderlands continue to defy the government in Kinshasa. 

The January peace pact was signed by Tutsi rebels loyal to renegade General Laurent Nkunda, by the government of President Kabila and by several militia and armed groups from the country’s North and South Kivu provinces. But a recent report by the International Rescue Committee – a hands on NGO, which having been founded in 1933 goes back further than most - disclosed that, despite billions in aid, the deployment of the world’s largest peacekeeping force, and the country’s recent ‘democratic’ elections, around 45,000 people continue to die each month in Congo, chiefly from starvation and disease.

Although a technical peace is now in place, it will take more than a signed piece of paper to secure peace for this troubled country.

The army is divided - substantial sections are opposed to the new political order. The level of integration of soldiers into the brigades in North Kivu, largely controlled by a rebel group backed by Rwanda called the Congolese Rally for Democracy (RCD), remains a worry. North Kivu has been the epicentre of the violence that has gripped the country for well over a decade. The situation is compounded because the loyalty of the troops in South Kivu is unclear. 

Yet, the DRC remains a vital investment destination, given its mineral wealth. Mining companies waited with a degree of apprehension for the long-delayed review of mining licences, and in February, got an inkling of what they can expect. The gist of the review is that Kinshasa will try to take as much as it can from the mining companies while simultaneously increasing government control over the sector. The announcement was finessed by the vice-minister of mines who noted that it was the authorities’ intention to ‘weed out illegal contracts’ written during the country’s civil war. There’s some justice behind that aspiration, although this being Africa things are slightly more complicated, and not all the war’s dubious contracts are being re-investigated in as much depth as they might have been.

Thus, Anvil Mining, a Toronto-listed copper miner in the DRC has been asked to pay a cash bonus of US$150 million to the state mining company, Gecamines; another Toronto-listed miner, First Quantum Minerals, learnt from the review commission that its title to its copper and cobalt project at Kolwezi was ‘improperly structured’. Ther are also serious doubts around major projects controlled by AngloGold Ashanti and Freeport McMoran. The dilemma for foreign mining interests is whether to renegotiate their contracts with Kinshasa at an individual level, or to go down the legal route. The latter could take years, and protracted disputes could turn out to be a blessing for China, as the recent infrastructure-for-commodities deal won by Chinese companies, worth $9 billion, suggests. Indeed, the World Bank advised anyone who was listening back in November 2007, that “any decisions to annul, renegotiate, amend, or adjust mining contracts should not be contemplated lightly”.

Even as the review of mining licences was disclosed, hundreds of miners employed by the state mining company, Gecamines, clashed with police in Katanga province. Their grievance: as casual miners they are afraid of losing their livelihoods as the government seeks to sell mining concessions to foreign investors. Complexities abound.

Experienced hands in the DRC will be well acquainted with the several challenges of doing business in the country. The banking system is said by some to have effectively collapsed. There’s no real protection of property rights, and that’s not just because of endemic corruption, but also because the government has a propensity to expropriate property. That state of affairs is further exacerbated by a weak, and far from independent judiciary. Furthermore, the few functioning roads are crisscrossed with militia roadblocks, each attempting to extort a separate toll on traffic. It would be too much to expect in the short to medium term that Joseph Kabila’s government can improve governance as well as the business climate, or that the necessary structural reforms will be delivered any time soon.

Forecast: Tough business environment

The challenges facing Joseph Kabila’s government are huge. It needs, as a matter of urgency, to get a handle on the divisive regional tensions, ethnic divisions, a factional army and dangerous militias. The country depends on its mineral wealth to bring in foreign investment, but as the recent review of mining contracts shows, contracts can be manipulated. More importantly, only a small handful of corrupt Congolese have thus far been enriched by the country’s mineral wealth, and there is little evidence to suggest that this corruption will abate in the short-term. The brutalisation of an entire nation has been years in the making, and this unfortunately, affects the reality on the ground.

Investment Outlook: Tough


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## drillinto (11 January 2009)

What does the Coppock Guide now say ?

http://www.tradersnarrative.com/coppock-guide-update-for-december-2008-forecast-2190.html


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## drillinto (14 January 2009)

Economic Weather Station (USA)

http://www.economicweatherstation.com/


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## drillinto (25 January 2009)

Must read !

"The aftermath of financial crises"

http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

[ A glimpse of what is likely in store for us in the coming months and years ]


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## drillinto (6 February 2009)

"Monster move" coming for stocks ?

http://finance.yahoo.com/tech-ticke...:-S&P-Could-Hit-1000-by-Spring,-Harrison-Says


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## drillinto (21 February 2009)

Alan Abelson (Barron's / USA) is not ecstatic about the outlook for either the American economy or the stock market.

http://online.barrons.com/article/SB123517396995937201.html?page=sp


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## drillinto (27 February 2009)

"There will be blood"
[Recommended reading]

http://www.theglobeandmail.com/serv...andrecovery/home?pageRequested=all&print=true


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## drillinto (16 March 2009)

SATURDAY, MARCH 14, 2009 
UP AND DOWN WALL STREET   

No Safe Haven 
By ALAN ABELSON  | Barron's (USA)

Why the bullish consensus on China is wrong. Beware the decoupling myth.

ANY WEEK THAT BERNIE MADOFF GOES TO JAIL and has an excellent shot at spending the next 150 years there, or that General Motors tells Uncle Sam it doesn't need two billion more of the taxpayers' hard-earned smackers (well, not just yet anyway), or that the stock market goes up four whole days in a row, or that Jim Cramer gets his ears boxed by Jon Stewart, can't be all bad.

Amid such an awesome, luminous constellation of splendid and unaccustomed uplift, it's tough to single out one piece of good news that outshines the rest. But our vote would have to go to the miracle leak that revived investor spirits and restored their hopes, along with a measure of happiness and even flickerings of greed -- faint, but welcome nonetheless -- as moribund stock markets awoke from one end of the planet to the other.

For this miracle leak the world is indebted to Vikram Pandit, the CEO of Citigroup , who -- as you probably already know (any a good journalist, we take considerable pleasure in telling you what you already know) -- wrote an internal memo that was solely for the eyes of anyone who can read (which may very well exclude a number of his fellow bankers).

Besides breathing new life into equities virtually everywhere they're traded, the leak can lay claim to being miraculous on another score, too. For truly amazing is the fact that its contents would incite anyone with even the most cursory knowledge of finance to buy stocks.

Essentially, Mr. Pandit's memo relayed the less-than-startling revelation that if you disregard, as any polite person is obligated to, the $301 billion of toxic assets sitting atop its balance sheet like a grinning monster waiting to pounce and the something like $45 billion our munificent government out of the goodness of its heart has poured into Citi's rather strained coffers, plus a few other pesky details, it's making a profit!

It could be, of course, that what so elated investors was not so much Mr. Pandit's profits epiphany, but the possible broader inference to be drawn from it: In calculating earnings, don't muddy things up by including costs and taxes and other piddling annoyances. On that basis, investors, staring wistfully at their drooping portfolios, might have figured -- their pulses suddenly bounding -- that maybe those dead dogs might fetch something after all, and rushed to average down.

The question does come to mind, however: If Citi is, as Mr. Pandit asserts, turning a profit, why has it been putting the arm on the government for those big-buck infusions? And, while we're asking, why has its stock been hovering around $1 and the cost of insuring it against default risen 200% so far this year?

Believe us, we're not trying to spoil anyone's fun. The memo, whatever its flaws, undeniably turned around a market that almost everyone agreed was horribly oversold. (Any number of those folks have been saying that for months and months; we trust they were not foolish enough to act on their advice.) The only thing that makes us a little leery of the idea that we're actually witnessing one of those brisk bear-market rallies that carry stocks 20%-to-25% higher is that good-old-everyone expects it.

The fundamentals remain pretty bleak. Jobs continue to vanish at an alarming rate. Consumers are under remorseless pressure, psychologically and financially. The collapse in housing is still very much in force, and so is everything bad that issues from it.

None of this precludes a nice bounce. But it virtually preordains that a nice bounce will be followed by a not-so-nice break.

"THE BULLISH CONSENSUS IS 'RHUBARB, poppycock, bilge, balderdash and piffle.' " Thus spake not Zarathustra but Albert Edwards, who, thank heavens, is better-humored than Friedrich Nietzsche. Even so, like the old German philosopher, in utterance he favors plenty of shock and a paucity of awe.

The particular bullish consensus to which Albert, who labors for SociÃ©tÃ© GÃ©nÃ©rale, took such gentle exception has to do with China and, more specifically, whether it could artfully dodge the wicked economic slump that is rapidly embracing the globe. He voiced his decidedly unequivocal doubts in a commentary penned a couple of weeks ago, and, so far, he has had no reason for regrets.

Yes, we're quite aware that the Beijing brass insists that once its half-a-trillion-dollar-plus stimulus program is in full swing, the country will start to race ahead big-time again, and wind up the year with 8% growth. Chinese data are often spongy, especially when they make for unpleasant reading. And we don't think we're being ungenerous when we suggest that you might do worse than give the official estimate of this year's GDP a haircut of, oh, say, 50%.

This less-than-exuberant prospect was only reinforced by the recent disclosure that China's pride and joy -- its extraordinary trade balance -- has rather abruptly taken a big dive -- indeed, the worst ever: to $4.8 billon in February, from $39.1 billion in January and over $8 billion in the same month last year. Exports, the dynamo of China's spectacular growth since it began its true emergence as an economic power some three or so decades ago, shrank by a formidable 25.7% last month, accompanied by a whopping 24.1% drop in imports.

As to the much-heralded $585 billion stimulus effort that's supposed to kick-start the Sino-economy, it appears to be directed largely to infrastructure, where it is least needed, rather than to consumption, which could use juicing up.

Premier Wen Jiabao allowed on Friday, at the wind-up of a powwow of the National People's Congress (the moniker of what passes for a legislative body in China's one-party-rules-all political system), that his nation's economy had lost some of its "vitality" and, with an admirable lack of subtlety, laid the blame on Uncle Sam's profligate borrowing and spending.

Mr. Wen has cause to be, as he put it, "a little worried," since China holds, at last count, some $696 billion of those borrowings in the form of U.S. Treasuries. From an investment standpoint, this holding hasn't been exactly a gangbuster, off around 2.7% since the year began.

But, as it happens, worried as he might be about his country's exposure to the possible consequences of its huge hoard of our IOUs, it's not entirely clear what, beyond scolding us for our profligacy, Mr. Wen can do about it.

A shift into other governments' bonds doesn't seem too attractive (Germany's and France's, for example, are off more than three times as much as our Treasuries), and the Chinese haven't fared very well venturing into our equity market (think Blackstone, where its investment of over $10 billion has been cut in half).

Moreover, any precipitous dumping of Treasuries would do serious damage to the sizable chunk of that $696 billion pile of such paper it would inevitably still be holding.

It might stop adding to its stash of Treasuries, of course, but even here, the symbiotic relationship between the U.S. and China -- we buy the stuff they turn out and they lend us the money to do so -- makes that a pretty dicey alternative.

As Morgan Stanley's Stephen Roach trenchantly observed recently, while "the original excesses were made in America," where consumers went on a wild binge, fueled by the credit and housing bubbles, the rest of the world, and particularly China, "was delighted to go along for the ride."

To feed our voracious appetite for consumption, we ran massive trade and current deficits, importing surplus savings from abroad. And that, he laments, seemed a perfect fit for the developing countries of Asia, whose exports exceeded a record 45% of the region's gross domestic product in 2007.

What's more, it was China "that led the charge," boosting its exports to 40% of GDP, double the percentage seven years earlier.

And while Beijing is prodding the banks with some success (this is, remember, a "command economy") to lend more liberally, a lot of the companies to which loans are going seem to be stockpiling the dough. For that matter, the absence of anything resembling a real safety net in China compels its populace to save rather than spend, manifestly a mixed blessing for an economy straining for recovery.

As strongly intimated by the swoon in exports, the savage global slump already has left its ugly imprint on China. Countless plants have been shut down, and millions have lost their jobs, sending many of them straggling back to the rural areas whence they came. Aggravating the plight of these restive souls is that the country has fallen prey to a major drought.

Mr. Wen has vowed, if necessary, to toss more of the nation's $2 trillion in foreign reserves at the economy, should that $585 billion already pledged fail to do the trick. And we're not predicting an apocalypse for China any more than we are for our struggling fair land.

Pure and simple, our point is that, contrary to the wishful notion so widely bruited about Wall Street, China is scarcely invulnerable to the powerful vortical pull of the global recession. It is not slated to somehow regain its momentum and prosper on its own.

And so we heartily concur with Albert Edwards that the bullish consensus that China might just be the place for anxious investors to ride out the storm is poppycock, if not piffle.


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## drillinto (12 April 2009)

UP AND DOWN WALL STREET   

More Meltdown 
By ALAN ABELSON / Barron's(USA), 11 April 2009

It's only the middle innings of the great housing bust. Three cheers for Mr. Bass.

CARL BASS IS OUR KIND OF GUY. LET US HASTEN TO confess, we don't know Mr. Bass, apart from the fact that he earns his daily bread running Autodesk , which does some $2 billion a year designing and servicing software, and whose stock was a hot number until it got killed by the bear market (12-month high, 43; 12-month low, a hair under 12; current price, 19 and change). In other words, until last week Mr. Bass was, so far as we were concerned, just another corporate honcho.

What brought our attention to Mr. Bass and won him our instant esteem was an item in the latest screed by our Roundtable buddy and indefatigable tech-watcher, Fred Hickey. More specifically, it directed us to February's conference call with analysts, occasioned by release of the company's earnings for the final quarter of its fiscal year, ended Jan. 31.

Mr. Bass kicked off the proceedings, as Fred noted, by telling the telephonically assembled analysts the bad news. Not only were the bum results a far cry from what he had grown accustomed to, but, he sighed, "the global economic downturn is now significantly impacting each of our major geographies and all of our business segments." The turn for the worse, he made it clear, included emerging countries where business had been robust, like China and India. And, he added, the immediate outlook was more than a touch murky.

None of which deterred an analyst, champing at the bit for good news, from asking whether there were any regions left to exploit that so far had proved immune to the global slump. "Well," responded Mr. Bass, "I think Antarctica has been relatively immune, maybe Greenland, as well, although not Iceland, as we all found out."

Besides the pleasure of finding a CEO with a sense of humor and, equally important, one who doesn't suffer foolish questions gladly, the exchange struck us as symptomatic of the insatiable yearning of Wall Street, in general, and sell-side analysts, in particular, to uncover some sliver of bullishness beneath the dismal surface of the unvarnished truth.

That touching tendency to mistake dross for gold has been much in evidence in this spirited stock-market rally, five weeks running and still kicking. And it has by no means been restricted to analysts; it has infected market strategists and portfolio managers, to say nothing of economists (which is about all one can say about them without resorting to invective).

Even the most unfavorable news, from the relentless shrinkage in corporate earnings to the inexorable rise in unemployment, is all too often blithely shrugged off with the observation that "it wasn't as bad as expected," while neglecting to identify by whom. Nor does it seem even passing strange to the growing ranks of wishful bulls that banks that went begging to Uncle Sam for bailouts and were rewarded with billions have magically discovered, come the earnings reporting season, that, by gum, they're suddenly remarkably solvent (or should we say, seemingly solvent; just disregard several trillion dollars' worth of ugly stuff on their collective balance sheet, please).

We realize, of course, that Washington is on the case. And we feel for the poor, anonymous soul charged with the task of almost daily sending aloft still another trial balloon to rescue the banks. But we suppose she or he does gain a measure of satisfaction from the fact that even if the balloon goes nowhere but poof, more often than not it provides a fresh fillip to the markets.

Indeed, if anything, this whirlwind activity by the administration's economic team, this profusion of blueprints for recovery, so many of which are rapidly discarded or revised or embroidered, by all rights should be giving widows and orphans the jitters rather than prompting them to take the plunge. For it smacks of confusion or panic or both.

Believe us, we're impressed by the vigor of the rally and it's gone much further and faster than we expected. And we think those hearty types agile enough to have played the big bounce deserve a big pat on the back. That doesn't mean, though, that we think it's for real or sustainable.

What would cause us to change our minds is some credible evidence that the dark forces that wrought this dreadful recession are starting to dissipate. Instead, it pains us to relate, we see rough going in the months ahead. And that suggests to these rheumy eyes a disappointed market resuming its skittish ways.

BACK IN MARCH OF LAST YEAR, WE RAMBLED on about a piece on housing by T2 Partners, a New York money-management firm. The report weighed a ton, but its heft was made more than palatable by a profusion of easily accessible bold-face tables and charts and a lucid text happily free of equivocation. We waxed enthusiastic about the analysis (and no, we hadn't been drinking). It was, of course, quite bearish.

Well, the T2 folks recently issued a follow-up to that prescient analysis, again festooned with nifty graphics and graced with straight-from-the-shoulder narration. They're still bearish and still, we think, on the money. That original report, incidentally, has blossomed into a book by Whitney Tilson and Glenn Tongue, who run T2 (you'll never guess how they got the name for their firm); the book is called More Mortgage Meltdown and is slated to be published next month (end of public-service announcement).

In their latest tome, the T2 pair begin with a crisp summary of why and how housing collapsed, in the process wreaking havoc on both the credit market and the economy. Among the usual culprits, most of which by now have had the cruel harsh spotlight of publicity turned mercilessly on them, Wall Street comes in for special mention and, in particular, its critical role in disseminating collateralized debt obligations and asset-backed securities, or -- as they're respectively, if no longer respectfully, known -- CDOs and ABSs.

Those structured monsters, note Tilson and Tongue, were a "big driver" of the surge in financial outfits' increasingly bloated profits. To produce ABSs and CDOs, Wall Street needed "a lot of loan product," of which mortgages proved a bountiful source. It's unfortunately quite simple to generate ever-higher volumes of mortgages. All you need do is lend at "higher loan-to-value ratios, with ultra-low teaser rates, to uncreditworthy borrowers, and don't bother to verify their income and assets."

The only catch is that the chances of such a mortgage being paid off are just about nil, a trifling caveat that bothered neither lenders nor pushers one whit. The result of that cavalier approach, as we all have reason to lament, in the end has been anything but happy: Today, mortgages securitized by Wall Street represent 16% of all mortgages, but a staggering 62% of seriously delinquent mortgages.

As for home prices, the T2 duo reckon, the unbroken monthly decline since they peaked in July 2006 will continue to make buyers hesitant and sellers desperate, while the "tsunami of foreclosures" will maintain the huge imbalance of supply over demand. In January, they point out, distressed sales accounted for a formidable 45% of all existing home sales and, they predict, there will be millions more foreclosures over the next few years.

They expect housing prices to decline 45%-50% from their peak (currently, prices are down 32%) before bottoming in mid-2010. They warn that the huge overhang of unsold houses and the likelihood that sellers will come out of the woodwork at the first sign of a turn argues against a quick or vigorous rebound in prices. Nor is the economy likely to provide a tailwind, since T2 anticipates it will contract the rest of this year, stagnate next year and grow tepidly for some years after that.

The first stage of the mortgage bust featured defaulting subprime loans and their risky kin, so-called Alt-A loans. Together with an additional messy mass of Alt-A loans, the next phase will be paced by defaulting option adjustable-rate mortgages, jumbo prime loans, prime loans and home-equity lines of credit.

All told, Tilson and Tongue estimate losses suffered by financial companies from mortgage loans, further swelled by nonresidential feckless lending, will run between $2.1 trillion and $3.8 trillion; less than half of that fearsome total has been realized. Which is why, they contend, we're only "in the middle innings of an enormous wave of defaults, foreclosures and auctions."

We don't want to leave you with the impression that the T2 guys are cranky old perma-bears. They aren't. At the end of their report they point out that "the stocks of some of the greatest businesses, with strong balance sheets and dominant competitive positions, are trading at their cheapest levels in years." Nothing wrong with the companies themselves, they believe; rather, the stocks got beat up mostly because of the cruddy market and soft economy. Victims, as it were, of the bearish trends.

The names they like that fall into that not exactly overly crowded category are familiar enough: Coca-Cola , McDonald's , Wal-Mart , Altria , ExxonMobil , Johnson & Johnson and Microsoft . That doesn't exhaust their portfolio picks, but those are the ones they obviously think are best suited to ride out any resurgence of the bear market.


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## drillinto (19 April 2009)

SATURDAY, APRIL 18, 2009 
UP AND DOWN WALL STREET   

Don't Bank on It 
By ALAN ABELSON | Barron's | USA |

The banks have been the spark plug of this powerful stock-market rally, but past may not be prologue. Goldman's missing month.

THE AMAZING RANDI. WE'D NEVER HEARD OF THE CHAP UNTIL last week, when we were indulging in an old habit that began way back when we were a copy boy (the journalistic equivalent of a galley slave) and took to passing some of the grudgingly little downtime allotted to us poring over the obituaries. Our interest was not born solely of innate ghoulishness, but nurtured also by the fact that an obit provides a highly compressed and often fascinating biography of those noteworthy souls who have recently departed from the ranks of the quick.

In this instance, the subject was not the Amazing Randi, but John Maddox, a British editor of considerable renown who transfigured a stuffy magazine named Nature into a scintillating science journal. Mr. Maddox, by all description an unflaggingly imaginative and energetic editor broadly versed in the sciences, was graced with a flair for the unorthodox and a sharp nose for bamboozle.

Back in the late 1980s, he published a piece by a French doctor claiming remarkable qualities for an antibody he had studied, but only on the condition that an independent group of investigators chosen by Mr. Maddox monitor the doctor's experiments. Among the investigators he chose was the Amazing Randi (nÃ© James Randi), a professional magician whose knowledge of science may have been limited but whose knowledge of hocus-pocus was peerless. The poor doctor's goose was cooked.

Mr. Maddox's engaging inspiration got us to thinking, gee, wouldn't it be great to have an Amazing Randi handy to help uncover the voodoo that has caused investors virtually en masse to suspend disbelief. We're referring, of course, to their marvelously revived tendency to slip on their rose-colored glasses, which for so long had been gathering dust on the shelf, when viewing corporate fortunes or the economy at large.

Take for example, dear old Goldman Sachs , which has enjoyed a mighty burst of enthusiasm among Street folk that has sent its shares sprinting to the vanguard of this smashing stock-market rally; an enthusiasm, moreover, that has spilled over to other banks and their financial kin. No argument, the firm has handsomely outperformed its few surviving rivals, none of which is blessed with Goldman's deft trading skills or tight Washington connections.

Goldie reported earnings of $1.8 billion for the first quarter. In doing so, it got a lucky boost from its switch from a fiscal year ending November to a calendar year. The shift came in response to statutory fiat, as part of Goldman's change to a commercial bank, a prerequisite to gaining eligibility for all those lovely billions in loans and guarantees the government has been showering on banks.

That $1.8 billion in March-quarter profits was a heap more than its analytical followers expected, and, as intimated, a sparkling demonstration of Goldman's vaunted trading agility (from what we can gather, it made a bundle in part by timely shorting bonds). The switch in its fiscal year took December out of the first quarter and made it an isolated, stand-alone month, relegated to an inconspicuous assemblage of bleak figures far in the rear of the company's 12-page earnings release.

As it happens, Goldman lost some $780 million in December, a tidy sum that obviously would have taken a lot of the gloss off its reported first-quarter performance. And, who knows, it might have even drained some of the zing that the surprisingly good results lent the stock.

But, in any case, the very next day, the spoilsport credit watchers at Standard & Poor's threw a bit of cold water on the shares by venturing that, in light of the soggy economy and unsettled capital markets, it would be "premature to conclude that a sustained turnaround" by Goldman was necessarily in the cards.

The financial sector, as even the most cursory spectator of the investment scene doubtless is aware, has provided the crucial spark to this powerful bear-market rally. And, in particular, the return from the very edge of the abyss by the banks in the opening months of this year has revived fast-swelling bullish sentiment.

The question naturally arises: How did the banks, so many of which seemed to be slouching toward extinction, get their act together to the point where they were in the black in January and February?

In search of an answer, we turned up an intriguing explanation for this magical metamorphosis by Zero Hedge, a savvy and punchy blog focusing on things financial. Not to keep you in suspense, Zero Hedge fingers AIG , that repository of financial ills and insatiable consumer of taxpayer pittances, as the agent of the banks' miraculous recovery.

But not quite the way you might think. As Zero Hedge explains, AIG, desperate to hit up the Treasury for more moola, decided to throw in the towel and unwind its considerable portfolio of default-credit protection. In the process, the badly impaired insurer, unwittingly or not, "gifted the major bank counterparties with trades which were egregiously profitable to the banks."

This would largely explain, according to Zero Hedge, why a number of major banks actually, as they claimed, were profitable in January and February. But the profits, it is quick to point out, are of the one-shot variety, and, ultimately, they entailed a transfer of money from taxpayers to banks, with AIG acting as intermediary.

Lacking any deep familiarity with the arcana of credit swaps and the like, we can't swear to the accuracy of this analysis. But shy of conjuring up the Amazing Randi and have him unveil the truth, it strikes us as plausible -- and easily as persuasive as many of the various explanations we have come across for the surprising and rather mysterious turn for the better by the banks.

If by chance it proves out, it just might act as a sobering influence, and not just on the financial sector.

FRANKLY, WE'RE AS BORED WITH THIS BEAR market as anyone. And we fully understand, after a year of brutal pummeling, the frantic hopefulness with which investors respond to the inevitable bounce, especially when it's as robust as this one has been.

And we understand, too, their eagerness to grasp at the flimsiest hint of recovery and to strain to put a good face on every twist and turn of the economy, no matter how ugly. But we fear -- as some tunesmith crooned long ago -- wishing won't make it so.

There's nothing obviously wrong when investors, confronted by what seems to be a sold-out market and tired of sitting on their hands, decide to take a fling on a bear-market rally. And it certainly has been rewarding for virtually anyone who a month or so ago did just that. But an awful lot of folks don't have the time, the discipline, the nimbleness or the spare cash for that sort of hit-and-run investing.

And the danger resides in being carried away by a momentary spate of quick gains and turning a blind eye to the riskiness of the market, which now is a heck of a lot greater, if only because the advance has carried price/earnings ratios to elevated levels -- something above 20 on the Standard & Poor's 500 -- or to the critical negatives in the economy.

David Rosenberg of Bank of America/Merrill Lynch (we can't believe we said the whole thing) last week offered some worthwhile observations on the stock market and the economic landscape that just happen to buttress our own reservations.

He points out that the two groups that paced the sharp upswing were financials and consumer cyclicals, in which there are, respectively, net short positions of 5 billion and 2.7 billion shares. Which strongly suggests that not an insignificant part of the rally has been provided by shorts running for cover.

He also points out that the Russell 2000 small-cap index is up 36% since the March low, and has outperformed the S&P by some 980 basis points. As David says, "the last time it pulled such a massive rabbit out of the hat" was in the stretch from late November to early January, and the major averages proceeded to make new lows two months later.

Another amber light he spots is investor confidence. Over the past five weeks, he reports, Rasmussen, which takes a daily reading, has seen its investor-confidence index surge 32 points, an unprecedented climb in so short a span. This could be, he suspects, a "fly in the ointment for a sustained equity-market rally."

David has four markers that will signal to him that the economy is finally making the turn and starting an extended expansion. The first is home prices. The second is the personal-savings rate. Marker No. 3 is the debt-service ratio, and No. 4 is the ratio of the coincident-to-lagging indicators of the Conference Board.

Aggregating those four markers, he calculates that we are roughly 44% of the way through the adjustment process. That is a tick up from where we were last month. However, the improvement, he laments, has been very modest and very slow.

We should add that he also stresses that it's critical for both the economy and the market that payrolls stop shrinking. All the talk about jobless claims "stabilizing" is so much poppycock, he snorts. That number of claims, he notes, is still consistent with monthly payroll losses of around 700,000. As with industrial production, which is also in a vicious slump, employment must stop falling before a recession typically ends.

"Call us when claims fall below 400,000," he says, which is his estimate of "the cut-off for payroll expansion/contraction."

Until then, he warns, "the recession will remain a reality. Rallies will be brief, no matter how violent, and green shoots are a forecast with a very wide error term attached to it."


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## drillinto (25 April 2009)

THURSDAY, APRIL 23, 2009 
UP AND DOWN WALL STREET DAILY   

Bank Profits and Other Fantastic Tales 
By RANDALL W. FORSYTH  | Barron's | USA

Bizarre accounting rules make numbers look better, but the market isn't fooled any more.

YOU REALLY CAN'T MAKE THIS STUFF UP. That clichÃ© truly is wearing thin as the credit crisis drags on, but it remains as apt as ever.

Never more so, in fact, than as the wave of first-quarter bank earnings rolls in. At first, the stock market was bedazzled by the gains being posted during what was supposed to have been the darkest days ever seen in the history of finance. But the legerdemain that produced those numbers is no longer impressing the stock market.

As our colleague, Alan Abelson, wrote in the print edition of Up & Down Wall Street this week, it appears banks were beneficiaries of the travails of none other than American International Group (ticker: AIG.)

As AIG looked to hit up Uncle Sam for more money, it decided to close out billions of credit default swaps on exceptionally generous terms to the counterparties. The latter would include the biggest names on Wall Street and the City of London, who got to book outsized profits. But the market is belatedly coming to the realization that this windfall is unlikely to be repeated, so there's less to the first-quarter results than meets the eye.

Yet even stranger is the positive effect felt by the likes of Citigroup (C) and others from the flip side. Just as banks get a boost from the write-up of their assets, they get a fillip from the write-down of their liabilities.

Such is the unintended, Alice-in-Wonderland effect of mark-to-market accounting.

Dick Bove, the dean of bank analysts, now with Rochdale Securities, explains how mark-to-market accounting can thoroughly distort profits. To wit:

"Bank A sees the quality of its debt deteriorate. That means, under mark-to-market accounting, that it is able to buy the liabilities back at a discount and report a big profit.

"Bank B sees the quality of its debt improve. That means it is not able to purchase its debt at a discount because its debt has risen in price and this results in a big loss.

"In sum, the bank with weakening quality reports a profit and the bank with improving quality reports a loss. This, of course, makes no sense."

Citi fell into the former category and benefited. Conversely, Morgan Stanley (MS) had the misfortune of seeing its credit strengthen, so it reported weaker-than-expected earnings Wednesday and slashed its dividend to shore up its capital position.

Bove contends that everybody was all for mark-to-market accounting when it punished the banks when it artificially depressed its assets. Now that it is artificially reducing the value of banks' liabilities, mark-to-market accounting is being criticized for inflating banks' profits.

It's a "lose-lose" situation for banks, he concludes, and may now be eliminated, he says.

That may be an exaggeration, but Bove is unequivocally correct when he points out mark-to-market accounting obscures the cash flowing through the banking system. That is, how much banks are earning on the loans they make relative to how much they have to pay on the deposits they take in. Stuff a simple guy like me can grasp.

On that score, the numbers are simply awful. Capital One (COF) Wednesday fell 8.4% after conceding its loan-loss estimates for 2009 were too low. The major issuer of credit cards reported a first-quarter loss of $112 million after adding $124 million to its loan-loss reserves.

That follows earlier news from Bank of America (BAC), which reported blow-out overall earnings but admitted to deteriorating credit fundamentals -- about as stark an example of the upside-down bank reporting there's been this quarter.

To cite another clichÃ©, Abraham Lincoln said, "You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time."

The surge in first quarter earnings fooled only some of the people and only for a short time.

The big banks have to confront the conundrum that their best consumer customers are embracing the new frugality and are paying down their credit cards as fast as they can. Getting out from under 18% or higher interest charges is absolutely the best investment American households can make, but it deprives banks with their most profitable business.

Conversely, the banks' strapped customers are defaulting in soaring numbers, resulting in mounting losses. Even if banks charge 18% or more, they're losing more than that when borrowers lose jobs and can't repay. So banks are reacting by cutting credit lines, further crimping consumers.

Meanwhile, Washington is leaning on banks for their consumer-unfriendly practices of jacking up interest rates on folks when they're reeling from falling employment, incomes and house values. The government has even more to say to the banks now that they're wards of the state.

All that's pretty simple and straightforward, unlike the three-card-monte effect of mark-to-market accounting on banks' profits.

Given that banks have led the stock market's advance since early March, you've got to wonder about their leadership abilities from here.


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## drillinto (18 May 2009)

MONDAY, MAY 18, 2009 
UP AND DOWN WALL STREET   

No Pig Heaven 
By ALAN ABELSON | Barron's (USA)

The stock market missed a chance for a sentimental rally. Bad news brewing for health care.

WHAT MAKES TRYING TO GUESS HOW THE STOCK market will react to some unexpected piece of news such exciting sport is that the blamed thing more often than not is guided by a rationale all its own to which ordinary beings are not privy. A timely case in point is the suggestion by an Australian virologist that the swine-flu epidemic might have been caused by the accidental release of the virus from a laboratory carrying on genetic experiments.

One would think the very possibility of pigs being exonerated as the source of the epidemic would trigger a celebratory rally, since hogs have long occupied an important and unique place in Wall Street's bestiary, along with bulls, bears and sheep. For hogs are a transfigured species that bulls, bears and sheep turn into when they lose their senses. In short, that oink you hear may be your inner self.

Now, granted, the global health-care establishment was quick to pooh-pooh the Aussie researcher's notion, but that is hardly surprising considering that he was, by implication, fingering one or more of its members as having been severely negligent. But, in any case, the market is rarely reluctant to let facts stand in the way when it conjures up a reason to rally.

Don't get us wrong: We didn't expect it to go hog-wild over the possible exculpation of swine as the progenitor of the flu. But a nice, discreet show of sympathy in recognition of a long-standing kinship certainly seemed in order.

To be fair, investors had a full plate of news to weigh that may have distracted them from any purely sentimental gesture, such as President Obama's remarkable revelation that China might grow tired one of these years of lending us money (who knew?). And that, he posited, might pose a serious threat to our ability to continue to happily live beyond our means. Wow! And just to show he means to do something serious about it, he plans to limit this fiscal year's federal budget deficit to a mere $1.84 trillion, instead of the $2 trillion widely expected.

Over in the legislative arena, meanwhile, Nancy Pelosi, boss of the House of Representatives, admitted she had been briefed on harsh interrogation measures in 2003. But, she explained, the CIA flat-out lied to her and told her waterboarding was a favorite among prisoners with pool privileges, so she held her tongue (which, for Nancy, is real torture).

Another bit of intelligence out of Washington was also pretty much ignored, which is rather a pity because it seemed to us to offer an intriguing possibility for investors eager to get a bit of an edge on the crowd in the delicate business of picking stocks. And that was the disclosure that two SEC lawyers apparently had been making profitable use of non-public information, as the bureaucratic boilerplate dubs it, to trade stocks.

Unfortunately, their names weren't disclosed, but the more active of the pair made something like 247 trades during the past two years. These are enterprising types, and it isn't inconceivable they, or some of their like-minded colleagues, might welcome the opportunity to branch out and provide investment advice to nice folks like you -- for a fee, natch -- based on their access to inside information. When we learn more, like who they are and the details of their past performance, we'll be only too happy to pass it along (gratis, of course).

We most certainly don't want to convey the impression that the market has been completely unresponsive to what's happening out there in the real world. The hard numbers on the damage being wrought to auto dealers -- GM informed 1,100 of those franchisers they'll be sacked next year, while Chrysler plans to give the boot to close to 800 -- did dampen animal spirits a tad last week. Another reminder, that for all the exultation that recovery may be just around the corner, it's proving a mighty long corner.

Lest you think we're perennially gloomy, let us disabuse you. We emphatically do not hold with Bob Prechter's forecast to the Market Technicians Association that equities still are at risk of falling between 50% and 80%. We'd hazard that the market won't lose more than a third of its current value, barring anything really bad happening. Feel better?

TOM GALLAGHER and Andy Laperriere, who put out the invariably informative Policy Report for Ed Hyman's ISI Group, provided an early heads-up on the health-care program being crafted by the House Energy and Commerce Committee. In its present form, at least, it promises to be anything but healthy for a host of providers in that fast-growing sector and, Tom and Andy say, "potentially devastating to managed care."

More specifically, by their reckoning, the bill could occasion a "massive shift from commercial, employer-based coverage to government coverage." An exchange would be created to set up and enforce standards for health care. At the start, the exchange would be open to individuals and employees of small business. But, in due time, it would be made available to workers for large companies as well.

One of the choices on the exchange would be a public plan modeled on Medicare. The public plan probably would pay Medicare rates to providers, which, Tom and Andy point out, are 20% to 30% less than commercial rates, obviously a big incentive for consumers to switch. For HMOs, they logically venture, that could mean a "tremendous loss of market share."

They caution that the measure being worked up is by no means the final word on what eventually might become law. But, they contend, "it highlights the risk to health-care stocks." All the more so, since most of the features in the bill "track the white paper" released last fall by Senate Finance Committee Chairman Max Baucus, a major force in the administration's push to overhaul health care.

ONE REASON THE STOCK market lost some of its steam last week, as more than one strategist pointed out, was that the curtain pretty much came down on earnings reports for the first quarter. Although a dispassionate viewer might wonder after perusing that wave of reports why anyone was particularly impressed by results that at best weren't bad as feared, overall they were anything but plump pickings.

According to good old Standard & Poor's, the latest tally on the 500 companies comprising its index offered painful proof that first-quarter earnings were nothing to write home about. The tally, which includes outfits accounting for a trifle over 90% of the constituents' market value, showed the majority suffered lower earnings than in January-March last year and the aggregate decline was more than one-third.

On a per-share basis, first-quarter earnings on the index came in a tad over $10. We're still looking for $40 or a couple of bucks higher for the full year, which means the S&P 500 is selling comfortably over 20 times 2009 earnings. Tell us, again, please, why, with the economy still in the pits, that is a raging bargain.

LOUIS LOWENSTEIN died last month. From his post as a professor at Columbia University specializing in business law, Louis kept a skeptical eye cocked on Wall Street and its multiple sins. Unlike most academics who turn their gaze on the investment scene, he had met a payroll and his exceptions to dubious Street practice and corporate shenanigans were grounded in a wonderful mix of pragmatic experience and exquisite intelligence.

Louis, with whom we chatted from time to time, was particularly exercised over the increasing tendency of investors to succumb, often in response to the Street's urgings, to the lure of short-term trading (that was long before day-trading had its 15 minutes of fame). He was also an earnest and eloquent advocate for individual shareholders, who he felt were given the short end of the stick by everyone from giant brokerage firms to mutual-fund managers.

He was a gentleman and a scholar and, however uninhibited in criticism when he spotted shabby behavior and bad actors, we always found him warm and encouraging. In so many ways, he was an irreplaceable spectator of the investment scene, a one-of-a-kind professional and learned gadfly, and his luminous presence will certainly be missed, not least by us.

While we are in a eulogistic mood, we'd like to say a few kind words about L. William Seidman, who died last week. Bill was an accountant who did a number of stints in Washington and somehow retained a remarkable impulse to speak the truth, no matter how politically incorrect or damaging to the folks he was working for. He was named head of the Federal Deposit Insurance Corp. in 1985 and was there when the great savings-and-loan bubble burst, which he handled with remarkable skill, dispatch and aplomb, shutting down dozens on dozens of bankrupt thrifts in the process.

Just as Louis Lowenstein battled for the individual investor, Bill Seidman waged a gallant fight on behalf of bank depositors. He also ran the Resolution Trust Co., set up in 1989 to snare what he could of the assets of failed thrifts to repay the billions of taxpayer funds spent on cleaning up the mess and here, too, he did a great job.

Bill was a man of many parts. Beyond his considerable government labors, his resume included vice chairman of Phelps Dodge, dean of the business school of Arizona State, talking head on TV, magazine publisher and author. We remember reviewing one of his books for the Sunday Times Book Review. As we recall, we described it as lively and informative, but the writing clunky. Monday morning we got a phone call from Bill, thanking us in his own inimitable clunky fashion.

They don't make them like him anymore -- and we can't think of a higher compliment.


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## drillinto (24 May 2009)

MONDAY, MAY 25, 2009 
UP AND DOWN WALL STREET   

Do Be Wary of Green Shoots 
By RANDALL W. FORSYTH | Barron's (USA)

Hold your horses on calling a new bull market -- the bear has several years to go.

BLAME THE BRITS. WHEN STANDARD & POOR'S SUGGESTED last week that the credit of the United Kingdom mightn't be exactly sterling because of its deficits and bailouts, it cast a worse light on America's standing. But an even worse blight has spread across the Atlantic.

It's said we are two nations separated by a common language, though English is hardly the lingua franca it once was on these shores. Be that as it may, Yanks have adopted a turn of phrase originated on the other side of pond, the "green shoots" that keep popping up everywhere.

It was originated by former British Chancellor of the Exchequer Norman Lamont, who was quoted as spotting green shoots in the British economy back in 1991, recalls Mark Turner, who heads the Pentagram Fund, a hedge fund that scored a 70% return in last year's collapse. Of course, Lamont would go on to oversee the ignominious withdrawal of the pound from the European Exchange Rate Mechanism the next year, which netted an infamous $1 billion windfall for George Soros.

So, why the attraction of green shoots? One can only speculate that they must be in some ways intoxicating. Perhaps not the shoots exactly, or the stems or seeds, but the leaves of a certain plant. Those might be smoked or otherwise ingested to bring about a euphoric effect. From what I've read, the current crop is far more potent than the commodity available in years past. How else to explain the mind-bending notion that an economy that is declining less quickly is somehow improving?

Yet, in a world going to pot, nothing should be dismissed. Prior to the resounding rejection by California's voters of various patches for the state's budget deficit, Gov. Arnold Schwarzenegger seemed open to a legislative proposal to legalize marijuana and tax it. Now facing a $21 billion budget deficit, the "Governator" isn't in a position to just say No to anything.

As an alternative, the state's treasurer called on the federal government to guarantee California's borrowings in a way the Ford Administration declined to do back in the New York fiscal crisis of the 1970s. That, of course, led to the immortal New York Daily News headline, "Ford to City: Drop Dead."

Having bailed out the banks and provided a lifeline to Chrysler and General Motors, how does Washington tell California, the eighth-largest economy in the world, to drop dead? That's the slippery slope that America's credit rating is on.

LAST YEAR, MANY CELEBRATED THE 40TH anniversary of the tumultuous events of 1968, a year that changed history, at least in the view of Baby Boomers who date it in terms of BE and AE (Before Elvis and After Elvis.)

Market historians have been pointing to 1938 as an antecedent for this year's action, as Mike Santoli has noted in his Streetwise column. So, too, has Louise Yamada, the doyenne of technical analysts, who now counsels clients via her LY Advisors after her long career at Smith Barney. Citigroup (C), in one of its many deft moves before it became a ward of the state, decided to axe Smith Barney's highly regarded technical-analysis group back in the middle of the decade.

"It is almost uncanny the degree to which 2002-08 has tracked 1932-38," Yamada writes in her latest note to clients. She has posited in her so-called Alternate Hypothesis that the structural bear market would be less like its most recent predecessor, from 1966-82, and more like 1929-42.

So the dot-com collapse parallels the Great Crash and its aftermath, followed by a rather nice recovery in 2003-07, similar to 1933-37. The parallels continue, with the collapse from late last year into this March tracing a similar, sickening trajectory to late 1937-38, as illustrated in Louise's chart nearby. That drop led to a strong reaction rally, not unlike the current one, for a total gain of 60%. But that was broken into three segments: an initial rally of 46%, similar to the move from the March lows. Then we saw a 10% pullback, not unusual in a rally, then another gain of 22%.


From there comes the hard part. Starting in November 1938, there was a 22% drop, qualifying for the 20% rule-of-thumb definition of a bear market; then a rally of 26%, fitting the definition of a bull market, into the fateful month of September 1939, the start of World War II.

Then came a series of bull and bear trades -- down 28%, up 23%, down 16%, up 13%, and the final decline into 1942 of 29%. After this nauseating roller-coaster ride, the market was down 41% from the 1938 highs (analogous to where we are now) to the 1942 lows.

The positive aspect of this, writes Yamada, is that the arduous process permitted individual stock consolidations to develop over years ultimately provided the base for a bull market in 1942.

But, she emphasizes, that means investors probably face years of frustration if they think a new, sustained bull market has begun. Structural bear markets typically last 13 to 16 years. Given the declines that have been suffered so far -- topped only by 1929-32 -- the structural bear has several years to go to complete the repair process.

As for the current rebound, it is rather like a bungee jump, with an elastic snap-back after a terrifying plunge. And it has been a kind of worst-to-first move.

David Rosenberg, ensconced at Gluskin Sheff in Toronto after years of distinguished duty as Merrill Lynch's North American chief economist, observes that the best performers have been the lowest-quality stocks or those with biggest short interest. "In other words, this was a rally built largely on short-covering, pension-fund rebalancing and the emergence of hope wrapped up in 'green shoot' data points," he contends. That makes its sustainability in doubt.

But the move has left many on the platform as the train pulled out of the station, including some of the biggest swingers in hedge funds, who are known in the market just by their first names.

WHAT IS LIKELY TO DISAPPOINT THE BULLS is the pace of recovery in corporate profits, according to the perspicacious Smithers & Co. of London. Earnings per share -- the sustenance of equity investors -- will be hampered by punk economic growth ahead and the need to repair corporate balance sheets.

Investors had come to regard the record profit margins of recent years as the new norm. Last year's were above average, despite the general perception they were squeezed.

Profits typically grow when the economy is expanding above trend, and vice versa. With U.S. growth likely to stabilize at only 1% into 2010, the outlook for earnings is apt to be, in a word, lousy.

Apart from the economic forces on profits, financial forces -- depreciation, leverage, interest costs and taxes -- are likely to push earnings per share down, Smithers observes. Deleveraging means share issuance rather than buybacks -- a reversal of the trend of recent years that worked to the benefit of corporate chieftains' bonuses. "The growth rate of earnings per share is thus likely to be worse than that indicated by profit margins alone," his report logically infers.

The bottom line, as it were, is that when the economy recovers, the benefits to corporate earnings accruing to stockholders will be disappointing. That could make for a frustrating equity market until the healing is complete, a moment that, as Yamada's profile suggests, could be years away.


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## drillinto (31 May 2009)

MONDAY, JUNE 1, 2009 
UP AND DOWN WALL STREET   

Read All About It 
By ALAN ABELSON  | Barron's (USA)

DAVID ROSENBERG, EX OF MERRILL LYNCH, is now chief economist and strategist (but a great guy nonetheless) of Gluskin Sheff, a money-management firm based in Toronto. (Dave, as we've mentioned before, hails from Canada.) Anyway, we're pleased to report, he's churning out what he calls his market musings and data deciphering (he's afflicted, poor chap, with a penchant for alliteration).

Crossing the border hasn't caused Dave to miss a beat. After perusing his latest batch of communiques, we can attest he's as sharp and incisive as ever, if anything maybe a touch more. He's that rare bird in the investment business who's skeptical without being invariably negative; who like Lord Keynes changes his mind when the facts change; who has firm convictions without being dogmatic and is able to convey his reasoning without resorting to gibberish. He also has a neat sense of humor.

We were particularly struck in his latest screed by his apostasy on government bonds. In true contrarian fashion, he takes issue with the increasingly popular notion that we've been witness to a bubble in Treasuries. "The Treasury market was never in a 'bubble,' Dave says. "Nothing that is fully guaranteed and pays a coupon semi-annually with no call or prepayment risk goes into a 'bubble' just because it was expensive at the yield's low."

He elaborates: "Sentiment never got wildly bullish; the public never became enamored of Treasuries; there were no widespread ownership or 'new paradigm' thoughts. At the lows in yield, there were legitimate concerns over a depression-like economic backdrop and deflation." But the Treasury market never met "the classic characteristics of a bubble," a la dot-com or housing.

Sounds reasonable to us.

Dave, we might add, in his most recent commentary points out that the delinquency data for the first quarter, courtesy of the Mortgage Bankers Association, were decidedly miserable. The overall mortgage-delinquency rate rose to a new high of 9.12%, from 7.88% the previous quarter and 6.35% in the corresponding three months last year. Subprime delinquencies shot up to 24.95%, from 21.88% in the final quarter of '08, while prime delinquencies rose to 6.06%, from 5.06% in last year's fourth quarter (and 3.71% in the like year-earlier stretch).

As Dave comments, "A year ago, the markets and the financials would have taken a big hit on data like this. But, heck, when the government steps in to guarantee the longevity of the large commercial banks," investors simply shrug off the bad news.

Still, he reflects, such dreary data are eloquent evidence of "the deteriorating level of credit quality, fully 18 months into this crisis." In short, don't do anything foolish.


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## drillinto (7 August 2009)

Paul Krugman on the prospects for recovery

http://www.advisorperspectives.com/newsletters09/Paul_Krugman_on_the_Prospects_for_Recovery.php


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## drillinto (18 September 2009)

September 17th, 2009

China’s coming magnificent bubble

James Saft
http://blogs.reuters.com/great-debate/2009/09/17/chinas-coming-magnificent-bubble/


If and when China makes its currency convertible and opens its financial system the stage will be set for a bubble that should make the dotcom and housing booms look tame.

China has recently signaled its key aspirations: for a greater international role for the renminbi and for Shanghai to become a great financial capital. Neither is imminent, but both imply, if not require, a series of steps that, taken in combination with China’s legitimately great potential for growth, could lead to a bubble of magnificent and dangerous proportions.

Magnificent in that, like the dotcom bubble or the railroad boom in the U.S. in the 19th century, a bubble in domestic China is directionally right and will build useful things which will change the world. A bubble, after all, needs a good story and China has one of the best ever.

Dangerous because, like the housing bubble, it will inevitably go too far and could take down banks and banking systems globally.

Perhaps rather than dotcom or housing, the most useful template for China is closer to home; namely the Japanese bubble which preceded its ongoing malaise, according to Dylan Grice, a strategist at Societe Generale in London.

“In the medium term we face the mother of all asset bubbles in China. The fundamental story is a good one; there are just lots and lots of people to sell to,” Grice said.

“If you drop a ton of liquidity on people it is possible that they will do rational things with it, but more likely they will do something pretty stupid.”

The parallels are strong. Both China and Japan successfully industrialized and opted for high-savings, low-consumption economies which concentrated on exports, exporting capital and keeping their currencies artificially weak. The result in both cases was a huge stockpile of U.S. Treasuries.

Both, too, scared their western clients and competitors witless. Remember U.S. autoworkers ritually burning Japanese cars? This of course was mingled with admiration and a sense that the global balance of power was changing, giving bubble thinking a strong push.

Japan slowly and over a long period liberalized its capital account; allowing the yen to float freely and deregulating financial markets.

Grice points out that during some of the 1980s the world fell in love with the yen, figuring that Japan’s new ascendancy meant that it would rise and rise. As a result Japan Inc. could in effect borrow in dollars, swap it into yen and get paid for the privilege. Much of the money found its way into the stock market, sending stocks to stratospheric levels and reinforcing the bubble illusion.

The Nikkei index of stocks went to the moon and Tokyo residents ended up needing 100-year mortgages to afford tiny apartments.

GOOD AND BAD BUBBLES 

Of course, that is not where it ended with Japan, which had its bust and which is still struggling with deflation, though that is in part a function of a shrinking workforce.

Japan liberalized its financial system and currency arrangements under strong pressure from the United States.

China almost certainly has more relative real power today and there is every sign that it will open up on its own terms and to its own schedule.

But open it probably will.

Chinese officials have expressed a desire for the renminbi to play a great role in world trade, naming 2020 as a date by which it can play the role of a reserve currency.

That is almost certainly going to require deregulation of financial markets, something also needed if Shanghai is to become a global financial capital.

China now buys Treasuries not because it thinks they are good value, but because those purchases maintain a competitive currency, not to mention protecting existing holdings. As that ends, much of the money will seek out high returns, and as the renminbi strengthens international capital will doubtless pile on and pile in.

That kind of liquidity and deregulation, in combination with strong national pride and a legitimately fantastic story, is a step-by-step recipe for a bubble. So it proved in Japan, so it likely will be in China.

A look at recent experience in China only underlines this. Speculation is rife and billions in government mandated loans have leaked into stock market bets.

China’s government undoubtedly understands all of this and is surely determined to maintain control. They may not find it that easy. Getting rich, as we’ve seen in the United States, is a heady business and it is easy to start to believe your own press.

As the momentum builds and the money rolls in it will be easy to see it as a great country meeting its prosperous destiny.

Given the size of the opportunity and the strength of the story, China’s bubble will be huge. Investors would do well to avoid being in the immediate vicinity when it bursts.


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## drillinto (29 November 2009)

A new website for your consideration:

www.aussiebulls.com
Example: NCM >> http://www.aussiebulls.com/StockPage.asp?CompanyTicker=NCM.AX&MarketTicker=Australian&TYP=S

This site analyzes all the securities listed in Aussie stock markets on daily basis[weekly analysis also available] using end of day data. The job accomplished in the background is immense. Approximately one hour after the closing bell unchecked day's closing data is collected and a preliminary update is made for the convenience of our website users. The final update is made later after approximately 6 hours. Most of this time is used for dowloading of the final corrected data for all the stocks and for checking false and suspicious data. The filtered data is then once more analyzed by a very sophisticated algorithm and the final update is made. 

The job at the background is very complex but presentation of the results is simple and user friendly. There are six trading signals posted. These are BUY-IF, BUY CONFIRMED, SELL-IF, SELL CONFIRMED, HOLD and WAIT. The signals are accompanied by daily commentaries. The commentaries are automatically generated for each signal and are revised in case of signal failures. A multiple factor weighting scheme assign stars to all the stocks ranging between zero and five. The average success of five star stocks is a very impressive 
89.38%. Other important features of the site are: intraday confirmation status, portfolio tracking, stock scanning, and two-year signal history, all of which are explained below. 

Most of this section of the site including the signals as well as the commentaries is open to public and free of charge. However, access to intraday confirmation module, star ratings, portfolio tracking and stock scanning are membership privileges.


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## spongetom (5 December 2009)

Awesome site, thanks for the risk. Wonder if it is worth the investment though.


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## noirua (29 May 2010)

'Risk' is probably the most important factor when investing in Shares.

The simplest way to have low risk is to keep most of your cash in fixed interest and other low interest investments. Why bother: Because markets will continue to boom and bust and if you are 100% in the market then it could well bust you.

Can you ever go low risk by having most of your money in shares. Yes, well probably - if you have a good pension and other assets that are substantial. 

One of the worse risk scenarios is to have very few assets, just a job, and investing all spare cash in high risk commodity and mining stocks - though at the same time you could have a whole portfolio of small higgled pi-geld stocks that could crash to very little, yes, just as bad.

What about lots of research, surely that reduces risk. No! All it does is help build profits, especially in bullish markets. When the big bear arrives it will rip and tear at everything, the best and worse.

Never be a forced seller. Yes, this is a high risk situation as well as having insufficient cash to take up a rights issue. In fact, if you are having difficulty covering the bills and have loads of shares then think carefully in your risky situation.

A one stock person. I've been there. It really means having a large part, perhaps 30%+ in one stock. When it crashes it has a serious effect on your health. That can happen when one stock takes off in value, great you think, as it rises 30 fold or even more.

When a stock falls in value we can try and average the price down by buying more. Remember though, that the original loss remains the same and you are being drawn in. However, if you keep lots of cash and fixed interest investments - 50% or more: Then the risk is lower. After all, this made me a recent fortune and I can't stop following this risky way of investing.

I could go on for ever about risk. It is, I believe, the most important factor in investing - good fortune.


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