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Sunday, 18 January 2009
Hard Landing Possible, Warn Ratings Agencies
The mainland economy could suffer a “hard landing” this year with a growth rate half its normal pace and face a rising risk of social unrest, international rating agencies warned yesterday.
The mainland economy could suffer a “hard landing” this year with a growth rate half its normal pace and face a rising risk of social unrest, international rating agencies warned yesterday.
The expansion of the nation’s gross domestic product could slow significantly to 6 per cent, less than half the 13 per cent rate that pushed the mainland past Germany as the world’s third-largest economy in 2007, according to James McCormack, the head of Asia sovereign rating for Fitch Rating.
Meanwhile, Kim Eng Tan, a Standard & Poor’s analyst, said its current estimate of a 7 per cent annualised growth of the mainland economy this year could be an overestimate, despite the central government’s ambitious stimulus initiatives.
Both rating agencies were also quick to point out the hidden credit problems of mainland banks.
Once viewed as stable when compared to the turmoil plaguing their overseas peers, they have been troubled by huge sell-offs by outside strategic investors over the past two weeks.
“The 6 per cent number is already what we would call a hard landing in China, meaning rising unemployment and the need for an aggressive policy response,” Mr. McCormack said yesterday. “Social unrest is a big unknown.”
Beijing officials have repeatedly voiced confidence in achieving an 8 per cent GDP growth rate this year, a number widely viewed as the minimum to absorb new job seekers.
Exports, for long a driving force behind the rapid growth, may decline 6 per cent this year from last year because of the global recession, Mr. McCormack said. That compares with a 17.2 per cent gain last year.
Amid the bleak outlook for the economy, the banking sector drew particular concern.
“Chinese banks will face a pretty bumpy road in 2009,” said Chunling Wen, a China bank analyst with Fitch.
Mainland banks, most of which posted double-digit increases in net profit, had relatively limited exposure to the toxic debt that has felled their western rivals, Ms Wen said.
However, they had hidden problems masked by the ambiguous and disparate standards applied by mainland lenders in rating their own problematic loans.
“The tricky part is that you can’t tell their real financial health from conventional indicators such as the non-performing loan ratio,” Ms Wen said.
This week, the Royal Bank of Scotland said it sold its £1.6 billion (HK$18.13 billion) stake in the Bank of China. Swiss bank UBS and Li Ka-shing’s foundation also have unloaded Bank of China shares.
The Beijing authorities have ordered the state-controlled banking sector to increase lending to give a shot in the arm to the government’s overall campaign to arrest the economic downturn.
HSBC: Interesting Options Activity, Proceed with Caution
January 14, 2009
While we usually leave all the options coverage for some of our other favorite blogs, we simply had to point out this interesting activity in HSBC (HBC). Optionmonster has highlighted the fact that as of Monday (Jan. 12):
"HBC traded 173,000 puts versus average of 7,700 puts over the past 30 days. Crazy busy and 94 percent trading out in March."
Activity was mainly in the March contracts at the 50, 45, and 40 strikes. If it continues to escalate, they said the activity would remind them of that once seen in Lehman Brothers and Bear Stearns. They also noted that it was the largest put activity in that name, ever.
And, yesterday (Jan. 13) the put activity continued, as the March 25's were starting to see volume. As you can see from the chart below, HSBC is in a strong downtrend and at the time of writing was trading around $45, a level of recent support. If it breaks this level, then look out below.
We have highlighted HSBC as a short on the blog numerous times. Back in August, we noted that delinquencies were rising across the board and the best way to play it would be to short institutions with lots of leverage, derivative exposure, or residential and commercial mortgage exposure. Our post on August 31, 2008 suggested shorting C.B. Richard Ellis (CBG), General Growth Properties (GGP), Capital One (COF), Discover Financial (DFS), HSBC and Washington Mutual (WM). Obviously, shorting all of those names has paid us off handsomely.
GGP and WM both collapsed rather quickly. However, all along, HSBC has been meandering along, trading sideways. In our post on September 16, 2008, we looked at writedowns, losses, and capital raised for various institutions. At that time, we noted that:
"One institution in particular I want to point out is HSBC: $27.4 billion in writedowns and losses, but only $3.9 billion raised. It, by far, has one of the more lopsided ratios. Now, we obviously know that this simple chart does not tell the whole story, but I thought it was worth highlighting."
Then, in October, signs of weakness started to appear as the market turmoil continued. Our post on October 8, 2008 highlighted various Leverage Ratios of financial institutions. In that post, we saw that HSBC's leverage ratio (total assets/equity) was 20.1 as of June 30 2008, an increase from their ratio of 18.4 in 2007. At the time, we saw that HSBC loosely had this deadly mix: use of leverage, large writedowns, and low capital raised.
HSBC has been in a downward spiral ever since, and now we see news of interesting options activity in the name. While we by no means think HSBC is in as bad of shape as a Lehman or Bear, we do think rough waters are in store and that is why we've highlighted them as a short numerous times in the past.
Proceed with caution, as the $45 support level is more important now than ever.
Looks like another financial tsunami is coming !!! ..just look at.........
14 January 2009 by Kevin Scully
The deterioration in economic and corporate data continues. I believe that the market has not fully discounted the extent of this deterioration and when it does this will lead to another big wave of selling - another financial tsunami !!!
Over the last few days, I was looking at trade data for December 2008 for China and November 2008 for the US. China reported a 2.8% decline in exports in December up slightly from a 2.2% decline in November. Imports fell sharply by 21.3% up from a 17.9% fall in November 2008. This is worrying as the Chinese economy was supposed to be more resilient and was driven by its own domestic demand. These figures could suggest a slowdown even in China's own domestic consumption because of the sharp decline in external demand for its products. The US November 2008 exports fell 5.7% to US$142.8bn while imports fell an even sharper 12.1% to US$183.2bn. Although this helped narrow the US trade deficit to US$40bn compared to US$57bn in the previous month, the large decline in imports shows the impact of the consumption contraction from the economic downturn in the US.
Let me translate this economic data into what is happening in a normal electronics company operating out of Singapore and with manufacturing operations outside of Singapore. Demand is bad and orders and indicative orders are being cut or cancelled every week/month. Suppliers are now stuck with 2-3 months worth of inventory (which is declining in value) as customers cancel orders. Bank and other supplier credit lines are being cut.....net result plant shutdown for a few weeks with staff going on no pay leave or for those in more serious cashflow distress - 70% staff layoffs. These are expected to accelerate after Chinese New Year. These means the worse is yet to come for manufacturing companies and their bankers.
Just look at HSBC....it was one of two safest banks in the World - the other being Standard Chartered into Q4-2008. Now its being hit by exposure to Madoff. I just read a research report from a large US investment bank (dont know if we can use the word large now) which is lowering FY2008 earnings by 17% and FY2009 earnings by 37%. They have lowered their price target to HK$52 from the current share price of more than HK$70 now and expect the bank to need refinancing of about US$20-30bn. This is their worse case scenario. I am surprised by this downgrade mainly because HSBC was the first to identify sub-prime as a problem and took the hit and exited the market in 2006. They also refused help from the various Central Banks until recently.
If such a highly regarded and conservative entity can see such a sharp turnaround in fortunes - what about less strong and diversifed companies. I am not saying that the US investment bank is correct but the almost 360 degree turnaround in fortunes is sobering and if HSBC does go down to just over HK$50 per share - what does mean for the Hang Seng Index ?
LONDON -- Dresdner Kleinwort upgraded HSBC to buy from hold Friday, saying a likely dividend cut is now fully discounted in the share price after the stock fell around 23% in a month. The broker said it hasn't changed its core view that HSBC will cut its dividend and that it might need to top up its core capital by $10 billion if losses in its available-for-sale book become definitive.
Exclusive Interview with Jim Rogers: Inflation Is Coming
By Grace Cheng January 15, 2009
In this DailyMarkets.com exclusive, I spoke by phone with legendary investor Jim Rogers who made his fortune with the Quantum Fund, a hedge fund he co-founded with George Soros in 1970. Over the next 10 years, Quantum gained 4200% while the S&P 500 index rose about 47%.
He is also the author of the best-selling books “Hot Commodities”, “Investment Biker” and “Adventure Capitalist”. Rogers, who created the Rogers International Commodities Index (RICI) in 1998, is one of the most closely watched investors. If you are fed up with the Fed, you are not alone. Recently, Rogers said that Paulson and Bernanke should resign for keeping “zombie banks” alive as they should be allowed to fail.
His uncanny accuracy in predicting the recent commodity bull run as well as the financial crisis has made the media, as well as private and institutional investors, sit up and listen to what he has to say about the markets.
Grace Cheng: Do you think the period of forced liquidation has ended or does it still have a ways to go?
Rogers: I’m sure it has not ended. It certainly has not ended for many asset classes and it probably has not ended for most. It may be over for a few things but it still has a long way to go.
As you’ve said many times, the US government is printing a lot of money right now, when do you think inflation will come around and bite us?
Rogers: Well there is inflation now in many things. There’s temporary deflation in raw material prices and in some property. But throughout history, whenever you’ve had gigantic printing of money and spending of borrowed money, it has always led to higher prices. Unless something is dramatic, it’s going to happen again. When? I don’t know. It’s already happening in some things. I don’t know if you’ve bought any sugar recently or some other things, prices are up and that will continue and it will get worse.
You’ve been bullish on commodities for a long time, recently you said you’re buying the Rogers Metal Index. Do you think that the Obama stimulus plan will create more demand for commodities?
Rogers: Well of course, anything that causes a revival of economic activity causes a revival of demand for everything including commodities. I mean if you’re gonna build bridges you’ve got to build them out of something you cannot build virtual bridges you have to build real bridges, etc.
You’ve said that over the long term, the US dollar is doomed. What are your thoughts on the British Pound?
Rogers: More doomed. It will disappear sooner. If it weren’t for the North Sea, the British Pound would have already disappeared. It’s more doomed. The UK has been exporting oil for 26 years; within the decade, the UK will be a net importer of oil again, and they have nothing else to sell to the world once the oil dries up.
Do you think China will scale back on buying US bonds? And if that happens, how will it affect the US economy and the US dollar?
Rogers: Well if I were China, I would scale back. If I were everybody, I would scale back. The US bonds yield virtually nothing, the dollar is a flawed currency, inflation is coming, higher interest rates are coming. I would think everybody would be scaling back including China. We’re going to have higher interest rates down the road because somebody’s gonna scale back. If not China, Japan or Korea, or who knows, somebody.
You’ve been buying Chinese stocks for many years already, now that China’s economy is doing badly and exports are decreasing significantly, what sectors are you looking at in China?
Rogers: Agriculture, water treatment, people who build power generation, people who build infrastructure, tourism. Many areas of the Chinese economy will continue to do well no matter what happens to the world economy. Many will suffer; anybody who sells to Wal-mart or retailers in America is going to suffer, others will do extremely well no matter what.
My last question, on a personal note, do you miss traveling around the world for fun like you’ve done several times before?
Rogers: No, because now I have two little girls and they’re more fun than anything. I hope someday that I will travel around the world with them for fun. But at the moment, watching them grow up and helping them grow up is more fun than anything I can imagine.
HSBC, UBS May Be Liable on Madoff as Fund Custodians
By Alan Katz, Jon Menon and Vernon Silver
Jan. 15 (Bloomberg) -- HSBC Holdings Plc and UBS AG may be liable for as much as $3.2 billion of losses linked to Bernard Madoff in a dispute over the duties of financial custodians at funds in Luxembourg and Ireland.
At stake is the image of the European fund industry, French Finance Minister Christine Lagarde wrote in a Jan. 12 letter to the European Commission and Luxembourg Prime Minister Jean-Claude Juncker. European funds’ assets increased 59 percent to 6.8 trillion euros ($9 trillion) over the past six years, partly because rules protecting investors made them attractive.
“If they aren’t required to pay the money, then investor protection doesn’t mean anything and people might as well just invest in offshore funds,” said Isabelle Wekstein-Steg, a lawyer at Wan Avocats in Paris who is representing 10 French retail investors and two institutions that face Madoff-related losses at Luxembourg funds. “UBS didn’t do its job of knowing at all times where the assets were, and the same with HSBC.”
Custodians are charged with oversight of funds, and they manage cash inflows and payments to investors. Those looking to recoup money would have to prove the banks failed to fulfill their duties, according to nine lawyers surveyed by Bloomberg News. HSBC has said it isn’t liable and UBS declined to comment on the issue.
HSBC and UBS’s custodian roles for the Luxembourg funds are limited because they were set up by investors specifically looking to place money with Madoff, said Paul Mousel, co-head of the financial services practice at law firm Arendt & Medernach in Luxembourg. He’s representing both banks.
‘Very Small Role’
“The arrangements that were put in place from the beginning are arrangements that gave to the custodian a very, very, very small role to play, especially regarding the safekeeping of the securities, which allegedly would have been purchased by the investors’ moneys,” Mousel said.
Wekstein-Steg sent a letter on Jan. 9 to Luxembourg’s financial regulator on behalf of her clients requesting that custodians reimburse their investments.
It’s impossible to say whether the custodian has any exposure without seeing the contracts of each fund, according to Julian Randall, a lawyer at Barlow Lyde & Gilbert LLP in London.
“What is clear is that there is unlikely to be any point to suing Madoff himself, and those who have lost money will be looking very hard at anyone, like HSBC, who was close to the action and also has assets,” he said.
Thema International Fund Plc and AA (Alternative Advantage) Plc filed a lawsuit against HSBC on Dec. 19 in Dublin’s High Court, according to court records. The suit charges that HSBC wasn’t able to confirm that assets in the funds were safe.
‘Potential Exposure’
London-based HSBC has $1 billion of “potential exposure” after making loans to institutional clients who invested with Madoff, it has said. Madoff’s firm collapsed last month after he told his sons it was a $50 billion Ponzi scheme, according to a complaint filed by the U.S. Federal Bureau of Investigation.
HSBC spokesman Patrick McGuinness declined to comment beyond the company’s Dec. 15 statement that it “does not believe its custodial arrangement should be a source of exposure to the group.”
UBS, based in Zurich, has said it doesn’t have material exposure to Madoff’s firm and declined to comment on the liability issue.
What Investors Wanted
“Bernard L. Madoff Investment Securities LLC and Madoff’s collective investment vehicles were not on the UBS Wealth Management recommended list as direct investment options,” spokeswoman Tatiana Togni wrote in a Jan. 12 e-mail in response to questions. At the $1.4 billion LuxAlpha Sicav-American Selection fund in Luxembourg, for which UBS is a custodian, “UBS has supported wealthy individuals by establishing a fund structure at their request.”
In a separate custodial issue, a Luxembourg court today ruled that UBS’s local unit must give a French money manager the 30 million euros ($39 million) the bank is holding on its behalf. Oddo & Cie. sold shares of LuxAlpha in November. UBS didn’t send the funds after Madoff’s Dec. 11 arrest because, as custodian, it needed to ensure that any action it took was in the interest of all investors, Mousel said on Jan. 12.
If investors do pry money from the custodians, it would add to the combined $81.7 billion in writedowns and credit losses UBS and HSBC have reported since the start of the global financial crisis in 2007.
UBS rose 1.5 percent to 13.81 Swiss francs ($12.30) at 2:24 p.m. in Zurich. HSBC was down 4.8 percent at 560.5 pence ($8.19) in London.
EU Review
Funds sold in the European Union to retail customers must follow rules on how money can be invested, called the Undertaking for Collective Investment in Transferable Securities, or UCITS. The rules also set out the responsibilities of custodian banks. Liability is determined under national laws in each member state.
The EU said yesterday that it’s reviewing how rules that require EU-regulated mutual funds to safeguard clients’ assets are enforced around the 27-country bloc.
France’s Lagarde said in her letter that not all member states impose the strict obligation for custodians to reimburse investors for assets that were entrusted to them, as France does.
Luxembourg Budget Minister Luc Frieden said French criticism of investor protection rules in the country is unjustified. The laws for custodian banks in Luxembourg are “identical” to those in France, he said.
Ireland, Luxembourg
Luxembourg and Ireland have worked to become distribution centers for investment funds, said Bernard Delbecque, director of economics and research at the European Fund and Asset Management Association. Luxembourg accounted for 30 percent of the overall 5.2 trillion euros of assets in UCITS funds in Europe at the end of September, he said. Ireland ranked third with 11 percent, behind France.
This month, financial regulators in both countries said in separate statements that custodians retain responsibility for monitoring and supervising funds, even if assets are placed with a third party.
Luxembourg’s rules specify that the custodian’s role should be seen as supervisory, “which implies that the depositary must have knowledge at any time of how the assets of the UCI have been invested and where and how these assets are available,” according to a document by the country’s central bank.
UBS is the custodian for LuxAlpha and the $419 million Luxembourg Investment Fund-U.S. Equity Plus, both of which are covered by UCITS. HSBC is the custodian for the $226 million Herald LUX-US Absolute Return Fund and Dublin-based $1.1 billion Thema International Fund Plc. The net asset values are the most recent provided by each fund, according to Bloomberg data.
Redemptions Suspended
The Thema and Herald funds are managed by Bank Medici AG, the Austrian bank founded by Sonja Kohn, whose clients invested $3.2 billion in Madoff funds. The Luxembourg Investment Fund is managed by UBS, and LuxAlpha by Access International Advisors, whose chief executive offer, Thierry Magon de la Villehuchet, was found dead Dec. 23 at his office in New York.
All four funds have suspended redemptions.
Two investors in the Thema fund said they invested in European funds to benefit from the added protection that brought.
Bernd Greisinger, a money manager in Liechtenstein who runs the BG Umbrella Fund for LRI Invest SA, said he chose Thema because it was a European-regulated fund that had to be deposited through a bank. Greisinger put in an order at the end of November to sell Thema shares for $2 million to $3 million. He hasn’t received the funds, he said.
Glenn Gramolini, a Geneva-based manager of Themis MN Fund PLC, which invested in Thema six years ago, said he bought the fund because the money was in the custody of a respected bank.
“Nowhere in the prospectus was it written that the funds would be handed to Madoff,” he said. “He would have been managing the funds. I would never invest in the funds when a manager is a custodian.”
You'll Never Walk Alone - Gerry And The Pacemakers
When you walk through a storm hold your head up high And don't be afraid of the dark. At the end of a storm is a golden sky And the sweet silver song of a lark. Walk on through the wind, Walk on through the rain, Tho' your dreams be tossed and blown. Walk on, walk on with hope in your heart And you'll never walk alone, You'll never, ever walk alone.
Walk on, walk on with hope in your heart And you'll never walk alone, You'll never, ever walk alone.
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Hard Landing Possible, Warn Ratings Agencies
Martin Zhou in Beijing
17 January 2009
The mainland economy could suffer a “hard landing” this year with a growth rate half its normal pace and face a rising risk of social unrest, international rating agencies warned yesterday.
The expansion of the nation’s gross domestic product could slow significantly to 6 per cent, less than half the 13 per cent rate that pushed the mainland past Germany as the world’s third-largest economy in 2007, according to James McCormack, the head of Asia sovereign rating for Fitch Rating.
Meanwhile, Kim Eng Tan, a Standard & Poor’s analyst, said its current estimate of a 7 per cent annualised growth of the mainland economy this year could be an overestimate, despite the central government’s ambitious stimulus initiatives.
Both rating agencies were also quick to point out the hidden credit problems of mainland banks.
Once viewed as stable when compared to the turmoil plaguing their overseas peers, they have been troubled by huge sell-offs by outside strategic investors over the past two weeks.
“The 6 per cent number is already what we would call a hard landing in China, meaning rising unemployment and the need for an aggressive policy response,” Mr. McCormack said yesterday. “Social unrest is a big unknown.”
Beijing officials have repeatedly voiced confidence in achieving an 8 per cent GDP growth rate this year, a number widely viewed as the minimum to absorb new job seekers.
Exports, for long a driving force behind the rapid growth, may decline 6 per cent this year from last year because of the global recession, Mr. McCormack said. That compares with a 17.2 per cent gain last year.
Amid the bleak outlook for the economy, the banking sector drew particular concern.
“Chinese banks will face a pretty bumpy road in 2009,” said Chunling Wen, a China bank analyst with Fitch.
Mainland banks, most of which posted double-digit increases in net profit, had relatively limited exposure to the toxic debt that has felled their western rivals, Ms Wen said.
However, they had hidden problems masked by the ambiguous and disparate standards applied by mainland lenders in rating their own problematic loans.
“The tricky part is that you can’t tell their real financial health from conventional indicators such as the non-performing loan ratio,” Ms Wen said.
This week, the Royal Bank of Scotland said it sold its £1.6 billion (HK$18.13 billion) stake in the Bank of China. Swiss bank UBS and Li Ka-shing’s foundation also have unloaded Bank of China shares.
The Beijing authorities have ordered the state-controlled banking sector to increase lending to give a shot in the arm to the government’s overall campaign to arrest the economic downturn.
HSBC: Interesting Options Activity, Proceed with Caution
January 14, 2009
While we usually leave all the options coverage for some of our other favorite blogs, we simply had to point out this interesting activity in HSBC (HBC). Optionmonster has highlighted the fact that as of Monday (Jan. 12):
"HBC traded 173,000 puts versus average of 7,700 puts over the past 30 days. Crazy busy and 94 percent trading out in March."
Activity was mainly in the March contracts at the 50, 45, and 40 strikes. If it continues to escalate, they said the activity would remind them of that once seen in Lehman Brothers and Bear Stearns. They also noted that it was the largest put activity in that name, ever.
And, yesterday (Jan. 13) the put activity continued, as the March 25's were starting to see volume. As you can see from the chart below, HSBC is in a strong downtrend and at the time of writing was trading around $45, a level of recent support. If it breaks this level, then look out below.
We have highlighted HSBC as a short on the blog numerous times. Back in August, we noted that delinquencies were rising across the board and the best way to play it would be to short institutions with lots of leverage, derivative exposure, or residential and commercial mortgage exposure. Our post on August 31, 2008 suggested shorting C.B. Richard Ellis (CBG), General Growth Properties (GGP), Capital One (COF), Discover Financial (DFS), HSBC and Washington Mutual (WM). Obviously, shorting all of those names has paid us off handsomely.
GGP and WM both collapsed rather quickly. However, all along, HSBC has been meandering along, trading sideways. In our post on September 16, 2008, we looked at writedowns, losses, and capital raised for various institutions. At that time, we noted that:
"One institution in particular I want to point out is HSBC: $27.4 billion in writedowns and losses, but only $3.9 billion raised. It, by far, has one of the more lopsided ratios. Now, we obviously know that this simple chart does not tell the whole story, but I thought it was worth highlighting."
Then, in October, signs of weakness started to appear as the market turmoil continued. Our post on October 8, 2008 highlighted various Leverage Ratios of financial institutions. In that post, we saw that HSBC's leverage ratio (total assets/equity) was 20.1 as of June 30 2008, an increase from their ratio of 18.4 in 2007. At the time, we saw that HSBC loosely had this deadly mix: use of leverage, large writedowns, and low capital raised.
HSBC has been in a downward spiral ever since, and now we see news of interesting options activity in the name. While we by no means think HSBC is in as bad of shape as a Lehman or Bear, we do think rough waters are in store and that is why we've highlighted them as a short numerous times in the past.
Proceed with caution, as the $45 support level is more important now than ever.
HK stocks end flat on HSBC worries
(01-16 17:56)
Hong Kong share prices closed 0.1 percent higher, as HSBC continued to pull down stocks on worries over its future dividend payments.
The Hang Seng Index closed up 12.55 points at 13,255.51 after trading between 13,113.45 and 13,423.24. Turnover was HK$47.07 billion.
HSBC fell for the fifth day, ending down 2.7 percent at HK$64.20 after a Goldman Sachs downgrade.
Mainland counters outperformed, with the H-share index rising 1.5 percent the sovereign wealth fund said it was raising its stakes in banks.
Bank of China jumped 4.6 percent to HK$2.04, ICBC rose 3.6 percent to HK$3.44, and China Construction Bank gained 3.7 percent to HK$3.91.
Hongkong Electric jumped 3.9 percent to HK$44.15, while Hong Kong & China Gas rose 0.8 percent to HK$12.24.
AGENCE FRANCE-PRESSE
***************************************************
Goldman Sachs downgrades HSBC
(01-16 14:21)
Goldman Sachs downgraded HSBC (0005) to ''sell'' from ''neutral'' on predictions of losses for this year.
It also slashed its target price on the lender by 36 percent to HK$49.
Goldman Sachs said it forecasts about US$1.5 billion (HK$11.7 billion) in losses for the banking giant this year.
Morgan Stanley on Wednesday had lowered its target price for HSBC by 30 percent to HK$52.
Shares in HSBC fell 3.3 percent to HK$63.80 in the morning.
Looks like another financial tsunami is coming !!! ..just look at.........
14 January 2009
by Kevin Scully
The deterioration in economic and corporate data continues. I believe that the market has not fully discounted the extent of this deterioration and when it does this will lead to another big wave of selling - another financial tsunami !!!
Over the last few days, I was looking at trade data for December 2008 for China and November 2008 for the US. China reported a 2.8% decline in exports in December up slightly from a 2.2% decline in November. Imports fell sharply by 21.3% up from a 17.9% fall in November 2008. This is worrying as the Chinese economy was supposed to be more resilient and was driven by its own domestic demand. These figures could suggest a slowdown even in China's own domestic consumption because of the sharp decline in external demand for its products. The US November 2008 exports fell 5.7% to US$142.8bn while imports fell an even sharper 12.1% to US$183.2bn. Although this helped narrow the US trade deficit to US$40bn compared to US$57bn in the previous month, the large decline in imports shows the impact of the consumption contraction from the economic downturn in the US.
Let me translate this economic data into what is happening in a normal electronics company operating out of Singapore and with manufacturing operations outside of Singapore. Demand is bad and orders and indicative orders are being cut or cancelled every week/month. Suppliers are now stuck with 2-3 months worth of inventory (which is declining in value) as customers cancel orders. Bank and other supplier credit lines are being cut.....net result plant shutdown for a few weeks with staff going on no pay leave or for those in more serious cashflow distress - 70% staff layoffs. These are expected to accelerate after Chinese New Year. These means the worse is yet to come for manufacturing companies and their bankers.
Just look at HSBC....it was one of two safest banks in the World - the other being Standard Chartered into Q4-2008. Now its being hit by exposure to Madoff. I just read a research report from a large US investment bank (dont know if we can use the word large now) which is lowering FY2008 earnings by 17% and FY2009 earnings by 37%. They have lowered their price target to HK$52 from the current share price of more than HK$70 now and expect the bank to need refinancing of about US$20-30bn. This is their worse case scenario. I am surprised by this downgrade mainly because HSBC was the first to identify sub-prime as a problem and took the hit and exited the market in 2006. They also refused help from the various Central Banks until recently.
If such a highly regarded and conservative entity can see such a sharp turnaround in fortunes - what about less strong and diversifed companies. I am not saying that the US investment bank is correct but the almost 360 degree turnaround in fortunes is sobering and if HSBC does go down to just over HK$50 per share - what does mean for the Hang Seng Index ?
HSBC upgraded to buy at Dresdner Kleinwort
By Simon Kennedy
Jan. 16, 2009
LONDON -- Dresdner Kleinwort upgraded HSBC to buy from hold Friday, saying a likely dividend cut is now fully discounted in the share price after the stock fell around 23% in a month. The broker said it hasn't changed its core view that HSBC will cut its dividend and that it might need to top up its core capital by $10 billion if losses in its available-for-sale book become definitive.
Exclusive Interview with Jim Rogers: Inflation Is Coming
By Grace Cheng
January 15, 2009
In this DailyMarkets.com exclusive, I spoke by phone with legendary investor Jim Rogers who made his fortune with the Quantum Fund, a hedge fund he co-founded with George Soros in 1970. Over the next 10 years, Quantum gained 4200% while the S&P 500 index rose about 47%.
He is also the author of the best-selling books “Hot Commodities”, “Investment Biker” and “Adventure Capitalist”. Rogers, who created the Rogers International Commodities Index (RICI) in 1998, is one of the most closely watched investors. If you are fed up with the Fed, you are not alone. Recently, Rogers said that Paulson and Bernanke should resign for keeping “zombie banks” alive as they should be allowed to fail.
His uncanny accuracy in predicting the recent commodity bull run as well as the financial crisis has made the media, as well as private and institutional investors, sit up and listen to what he has to say about the markets.
Grace Cheng: Do you think the period of forced liquidation has ended or does it still have a ways to go?
Rogers: I’m sure it has not ended. It certainly has not ended for many asset classes and it probably has not ended for most. It may be over for a few things but it still has a long way to go.
As you’ve said many times, the US government is printing a lot of money right now, when do you think inflation will come around and bite us?
Rogers: Well there is inflation now in many things. There’s temporary deflation in raw material prices and in some property. But throughout history, whenever you’ve had gigantic printing of money and spending of borrowed money, it has always led to higher prices. Unless something is dramatic, it’s going to happen again. When? I don’t know. It’s already happening in some things. I don’t know if you’ve bought any sugar recently or some other things, prices are up and that will continue and it will get worse.
You’ve been bullish on commodities for a long time, recently you said you’re buying the Rogers Metal Index. Do you think that the Obama stimulus plan will create more demand for commodities?
Rogers: Well of course, anything that causes a revival of economic activity causes a revival of demand for everything including commodities. I mean if you’re gonna build bridges you’ve got to build them out of something you cannot build virtual bridges you have to build real bridges, etc.
You’ve said that over the long term, the US dollar is doomed. What are your thoughts on the British Pound?
Rogers: More doomed. It will disappear sooner. If it weren’t for the North Sea, the British Pound would have already disappeared. It’s more doomed. The UK has been exporting oil for 26 years; within the decade, the UK will be a net importer of oil again, and they have nothing else to sell to the world once the oil dries up.
Do you think China will scale back on buying US bonds? And if that happens, how will it affect the US economy and the US dollar?
Rogers: Well if I were China, I would scale back. If I were everybody, I would scale back. The US bonds yield virtually nothing, the dollar is a flawed currency, inflation is coming, higher interest rates are coming. I would think everybody would be scaling back including China. We’re going to have higher interest rates down the road because somebody’s gonna scale back. If not China, Japan or Korea, or who knows, somebody.
You’ve been buying Chinese stocks for many years already, now that China’s economy is doing badly and exports are decreasing significantly, what sectors are you looking at in China?
Rogers: Agriculture, water treatment, people who build power generation, people who build infrastructure, tourism. Many areas of the Chinese economy will continue to do well no matter what happens to the world economy. Many will suffer; anybody who sells to Wal-mart or retailers in America is going to suffer, others will do extremely well no matter what.
My last question, on a personal note, do you miss traveling around the world for fun like you’ve done several times before?
Rogers: No, because now I have two little girls and they’re more fun than anything. I hope someday that I will travel around the world with them for fun. But at the moment, watching them grow up and helping them grow up is more fun than anything I can imagine.
HSBC, UBS May Be Liable on Madoff as Fund Custodians
By Alan Katz, Jon Menon and Vernon Silver
Jan. 15 (Bloomberg) -- HSBC Holdings Plc and UBS AG may be liable for as much as $3.2 billion of losses linked to Bernard Madoff in a dispute over the duties of financial custodians at funds in Luxembourg and Ireland.
At stake is the image of the European fund industry, French Finance Minister Christine Lagarde wrote in a Jan. 12 letter to the European Commission and Luxembourg Prime Minister Jean-Claude Juncker. European funds’ assets increased 59 percent to 6.8 trillion euros ($9 trillion) over the past six years, partly because rules protecting investors made them attractive.
“If they aren’t required to pay the money, then investor protection doesn’t mean anything and people might as well just invest in offshore funds,” said Isabelle Wekstein-Steg, a lawyer at Wan Avocats in Paris who is representing 10 French retail investors and two institutions that face Madoff-related losses at Luxembourg funds. “UBS didn’t do its job of knowing at all times where the assets were, and the same with HSBC.”
Custodians are charged with oversight of funds, and they manage cash inflows and payments to investors. Those looking to recoup money would have to prove the banks failed to fulfill their duties, according to nine lawyers surveyed by Bloomberg News. HSBC has said it isn’t liable and UBS declined to comment on the issue.
HSBC and UBS’s custodian roles for the Luxembourg funds are limited because they were set up by investors specifically looking to place money with Madoff, said Paul Mousel, co-head of the financial services practice at law firm Arendt & Medernach in Luxembourg. He’s representing both banks.
‘Very Small Role’
“The arrangements that were put in place from the beginning are arrangements that gave to the custodian a very, very, very small role to play, especially regarding the safekeeping of the securities, which allegedly would have been purchased by the investors’ moneys,” Mousel said.
Wekstein-Steg sent a letter on Jan. 9 to Luxembourg’s financial regulator on behalf of her clients requesting that custodians reimburse their investments.
It’s impossible to say whether the custodian has any exposure without seeing the contracts of each fund, according to Julian Randall, a lawyer at Barlow Lyde & Gilbert LLP in London.
“What is clear is that there is unlikely to be any point to suing Madoff himself, and those who have lost money will be looking very hard at anyone, like HSBC, who was close to the action and also has assets,” he said.
Thema International Fund Plc and AA (Alternative Advantage) Plc filed a lawsuit against HSBC on Dec. 19 in Dublin’s High Court, according to court records. The suit charges that HSBC wasn’t able to confirm that assets in the funds were safe.
‘Potential Exposure’
London-based HSBC has $1 billion of “potential exposure” after making loans to institutional clients who invested with Madoff, it has said. Madoff’s firm collapsed last month after he told his sons it was a $50 billion Ponzi scheme, according to a complaint filed by the U.S. Federal Bureau of Investigation.
HSBC spokesman Patrick McGuinness declined to comment beyond the company’s Dec. 15 statement that it “does not believe its custodial arrangement should be a source of exposure to the group.”
UBS, based in Zurich, has said it doesn’t have material exposure to Madoff’s firm and declined to comment on the liability issue.
What Investors Wanted
“Bernard L. Madoff Investment Securities LLC and Madoff’s collective investment vehicles were not on the UBS Wealth Management recommended list as direct investment options,” spokeswoman Tatiana Togni wrote in a Jan. 12 e-mail in response to questions. At the $1.4 billion LuxAlpha Sicav-American Selection fund in Luxembourg, for which UBS is a custodian, “UBS has supported wealthy individuals by establishing a fund structure at their request.”
In a separate custodial issue, a Luxembourg court today ruled that UBS’s local unit must give a French money manager the 30 million euros ($39 million) the bank is holding on its behalf. Oddo & Cie. sold shares of LuxAlpha in November. UBS didn’t send the funds after Madoff’s Dec. 11 arrest because, as custodian, it needed to ensure that any action it took was in the interest of all investors, Mousel said on Jan. 12.
If investors do pry money from the custodians, it would add to the combined $81.7 billion in writedowns and credit losses UBS and HSBC have reported since the start of the global financial crisis in 2007.
UBS rose 1.5 percent to 13.81 Swiss francs ($12.30) at 2:24 p.m. in Zurich. HSBC was down 4.8 percent at 560.5 pence ($8.19) in London.
EU Review
Funds sold in the European Union to retail customers must follow rules on how money can be invested, called the Undertaking for Collective Investment in Transferable Securities, or UCITS. The rules also set out the responsibilities of custodian banks. Liability is determined under national laws in each member state.
The EU said yesterday that it’s reviewing how rules that require EU-regulated mutual funds to safeguard clients’ assets are enforced around the 27-country bloc.
France’s Lagarde said in her letter that not all member states impose the strict obligation for custodians to reimburse investors for assets that were entrusted to them, as France does.
Luxembourg Budget Minister Luc Frieden said French criticism of investor protection rules in the country is unjustified. The laws for custodian banks in Luxembourg are “identical” to those in France, he said.
Ireland, Luxembourg
Luxembourg and Ireland have worked to become distribution centers for investment funds, said Bernard Delbecque, director of economics and research at the European Fund and Asset Management Association. Luxembourg accounted for 30 percent of the overall 5.2 trillion euros of assets in UCITS funds in Europe at the end of September, he said. Ireland ranked third with 11 percent, behind France.
This month, financial regulators in both countries said in separate statements that custodians retain responsibility for monitoring and supervising funds, even if assets are placed with a third party.
Luxembourg’s rules specify that the custodian’s role should be seen as supervisory, “which implies that the depositary must have knowledge at any time of how the assets of the UCI have been invested and where and how these assets are available,” according to a document by the country’s central bank.
UBS is the custodian for LuxAlpha and the $419 million Luxembourg Investment Fund-U.S. Equity Plus, both of which are covered by UCITS. HSBC is the custodian for the $226 million Herald LUX-US Absolute Return Fund and Dublin-based $1.1 billion Thema International Fund Plc. The net asset values are the most recent provided by each fund, according to Bloomberg data.
Redemptions Suspended
The Thema and Herald funds are managed by Bank Medici AG, the Austrian bank founded by Sonja Kohn, whose clients invested $3.2 billion in Madoff funds. The Luxembourg Investment Fund is managed by UBS, and LuxAlpha by Access International Advisors, whose chief executive offer, Thierry Magon de la Villehuchet, was found dead Dec. 23 at his office in New York.
All four funds have suspended redemptions.
Two investors in the Thema fund said they invested in European funds to benefit from the added protection that brought.
Bernd Greisinger, a money manager in Liechtenstein who runs the BG Umbrella Fund for LRI Invest SA, said he chose Thema because it was a European-regulated fund that had to be deposited through a bank. Greisinger put in an order at the end of November to sell Thema shares for $2 million to $3 million. He hasn’t received the funds, he said.
Glenn Gramolini, a Geneva-based manager of Themis MN Fund PLC, which invested in Thema six years ago, said he bought the fund because the money was in the custody of a respected bank.
“Nowhere in the prospectus was it written that the funds would be handed to Madoff,” he said. “He would have been managing the funds. I would never invest in the funds when a manager is a custodian.”
You'll Never Walk Alone - Gerry And The Pacemakers
When you walk through a storm hold your head up high
And don't be afraid of the dark.
At the end of a storm is a golden sky
And the sweet silver song of a lark.
Walk on through the wind,
Walk on through the rain,
Tho' your dreams be tossed and blown.
Walk on, walk on with hope in your heart
And you'll never walk alone,
You'll never, ever walk alone.
Walk on, walk on with hope in your heart
And you'll never walk alone,
You'll never, ever walk alone.
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