Where Asia stands...

The question everyone wants to know is When will things get better? I am talking about Asia in particular and Asia has a very serious concern that investors in US, Europe and Japan might choose to part ways for the time being.

But an Asian Economic Report by HSBC seems to think that the prospects for Asia are positive. The report states, "Fundamentally, we remain of the view that Asia does not suffer from the same financial dislocations seen in the West. As we mentioned previously this should set up the region for an ultimately faster rebound once global financial market uncertainties begin to abate. Therefore, with perhaps the exception of Korea and India, most of the latest financial rescue measures are defensive in nature, rather than indicative of elementary financial vulnerabilities. The primary concern of policy-makers in Asia is to shore up growth. Other measures, such as blanket deposit guarantees and emergency local liquidity injections, therefore appear unlikely across the region, although a number of central banks may continue to provide dollar liquidity directly into local markets to ease external funding strains".

I personally believe that the Asian markets will see a run up only post a short term consolidation. This might take between 3 to 18 months to happen, depending on other economic indicators. The Corporate Results for the coming quarter will be the crucial indicator. If everything goes as planned, then Asia might see itself as the leader of global economic revival by the end of August 2009.

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Sitting Out Professional Sports

Sports in US is bigger in more ways than one. For starters, its not just about a single sport (cricket), as in the case of India, but is a buffet of sports with equal feeding frenzy such as Super Bowl, Baseball, Ice Hockey, NBA, NASCAR or Golf.

So even though teams such as the Yankees saying to Bobby Abreu that "We can't pay you as much" or The New York Giants telling Eli Manning that "You're too expensive", is clearly not an option, they still have to somehow manage all this with the sponsorships dwindling and no takers for the Corporate Boxes.

Take Fedex for example. It used to be one of the front runners for advertising spots in the Super Bowl but is sitting it out this year. Similarly, the Dallas Cowboys, New York Jets and New York Giants are still searching for corporations willing to pay to put their names on stadiums the teams are constructing. The hit expected for advertising and Corporate sponsorship is on an average of 2 per slot which earlier used to be at least 10. This means that contrary to common belief, Professional Sports are NOT immune to the economic slowdown. This year the auction prices of Sunday Night Football tickets on ebay will come down and the top teams in the league are expected to lose millions of dollars in sponsorships and the league overall will see companies sitting out the season. In fact, some sports are expected to cut staff by as much as 2000 or more this year.

You thought Professional Sports were immune to financial crisis? Think Again....

Will the Big Auto have to Merge??

As if the congress denying the Big Auto a stimulus package earlier was not bad enough, this might happen again a second time. GM, Chrysler and Ford are looking towards the Congress for a $25 billion stimulus package in order to keep the production and R&D alive. The concern is very real as without technological edge, the US auto manufacturers might be rolling out empty shells after 5 years and most of them might have to close shop post December. In fact, as per Big Auto, the real requirement is as much as $40 billion and even a stimulus package will not be enough.

If nothing else works, then it’s very likely that the 3 companies might have to merge. If that happens, then they may not actually need the Congress anymore for any financial assistance as the combined entity would be more than eligible for a loan from the bank to meet all requirements. I won’t be amazed. There are stranger things in Heaven and Earth than we can imagine.

Better of 2 Evils

A question on every one's mind this Monday must have been that how did Citi manage to bag a $20 billion commitment from the congress when a week earlier the Big Auto were denied $25 billion and asked to chalk out a business plan about how to plan to utilize the money.

The answer is very simple though bitter. Its a matter of picking the better of 2 evils. If the auto industry goes down, then no doubt it will have a significant impact on the employment numbers in US, but if the second largest bank in US does down, then it will take with it much more than just employment. The impact could forestall an even worse shock to the already fragile financial system.

In the words of David Resler, chief economist with Nomura Securities International, "You can't have a financial world without the major banks".

But will there be a Detroit without the Big Auto?

Sarkozy's New World Order

Greenback Mystery

Everyone iswondering why in spite of the US economy being hammered, the Dollar is appreciating. Firstly, the investors are shifting to GETFs and Bullion which in turn is kicking the demand for Dollar as gold is measured in terms of dollars. Secondly, countries that are intertwined to the US economy know that their relationship with that of the US economy is of a symbiont nature. Hence they are maintaining dollar reserves and buying dollars, thus maintaining a steady demand for it. Thirdly, a depreciating dollar will hit oil revenues for OPEC nations. Hence they are channeling petro dollar purchases to keep the dollar valuations alive. This is to put in in a simplistic manner.

The bottom line is that if dollar depreciates too much, along with the US economies, several other economies will crumple including China since it has one of the largest reserves of dollar and also has mammoth holding is US government bonds. So its a "save your skin approach". Lets see how long this lasts......

FED: Post Bash Babysitting

Survival of the fittest should be the ideal way to work in a competitive market. Loss bearing units should be allowed to die their natural death if that is for the greater good of the market and the economy. This should especially be the case if businesses refuse to be cautious and responsible with the investors' money and don't learn from their mistakes.

The question is that is the FED's responsibility to ensure monetary and economic stability or to baby sit greedy investment bankers and provide them bail-out plans. I admire the SEC's step to temporarily ban short selling as a measure of damage control, but should the FED be providing bail out packages to banks who are so far down sunk in their own shit that even an robotic armadillo would fail to dig them out. Washington Mutual is another rotten lemon waiting to be recycled. If it goes down, it will cause the FED another $20 billion.

I agree that it breaks my heart to see some of these legendary names hit the dirt, but I rather see them die a natural death than give them another chance to ride people's money. An investor who would have invested in Lehman Brothers 6 months back, would today have lost 99.61% of his investment. Whether its right or wrong for the FED to babysit disasters is for you to decide. I have my fingers crossed and am hoping for the best.

FED Facts

Article 1 Section 8 of the US Constitution states that:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States:
“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures”

This power has been given to the Federal Reserve which in simple word means that the Fed can issue currency at will without any gold or silver backing it up. Most of this money coined by the Fed is loaned to the US Government and the government uses tax payers’ money to pay the interest on it. The facts about Fed are little known. It is the only financial body in US that has never been audited in 100 years. One of the theories of Kennedy assassination states that Fed was the reason JFK was assassinated. On June 4, 1963, President Kennedy signed the Presidential decree, Executive order 11110 which would strip the Fed off its power to loan money to the US government at interest. It also hinted that the Fed in future would have to report its affairs like any other financial institution in US and would have to make all information publicly available. In place of the Fed, the US Treasury Department would be given the authority to issue currency which would be backed by Gold and Silver. After signing the order, President Kennedy was assassinated in less than 5 months.

Even to this day, the Fed does not undergo any audit procedure and very little financial information about how the Fed functions is made public on its website. Mostly, the website has information about economic indicators and money circulation and a Balance Sheet which shows aggregate assets and liabilities of the banking system in the US.

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India Resilient to Wall Street Havoc

A week back the world would not have expected that two of the biggest names of the Wall Street would disappear overnight. It was heartbreaking to see Lehman Brothers trade at 21 cents yesterday and Merrill Lynch being sold to BoA for $40 billion. Amidst all this, there were signs of more companies lining up and facing the barrel of the gun. Washington Mutual saw its stock hit bad and AIG got eroded by more than 50% and sought a relief package of $4o billion.

In a previous post titled :"9 Big Whales - What went wrong with them?", I had mentioned that Richard Fuld was amongst the 9 CEOs who are likely to disappear by the end of 2008. Now, I hope for the best but signals being sent by AIG, UBS and Citibank don't seem positive. The last thing the world needed was for Goldman Sachs to come out and declare a fall in profits by 71%. The Fed has already decided to pump $50 billion into the financial system to try and stabilize the market and a few of the remaining investment giants at Wall Street have come together to form a contingency fund of $70 billion.

The short term outlook for US markets is negative and the coming quarter results for most Indian IT companies are expected to be disappointing. What is acting as an anchor for Indian markets is the fact that even after such a huge turmoil, the Sensex and Nifty both remained flat today. In days to come, I will have my eyes on AIG, UBS and Citibank.

Lehman Might Not See Monday Morning

Talk on Wall Street is hot about Lehman Brothers not seeing the light of Monday morning. After booking a $3.9 billion loss, Lehman is desperately looking for buyers to try and salvage whats left of the business. The two prime contenders for the offer are Bank of America and Barclays. It would be a sad day for the history of Wall Street and the CEO Richard Fuld if a 158 year old investment bank which is synonymous with the word investment ceases to exist by Monday.

Oil Drilling Falls from 23 Year High in US

Drilling activity in the oil industry is measured by the number of rigs. These rigs are further sub divided into Land Rigs, Inland Rigs and Offshore Rigs. US drilling activity today dropped from a 23 year high with 18 rigs down and 2013 still working as per a report by OGJ.

The major contribution to this decline was due to a fall in land rigs which were down by 19 rigs at 1919 rigs functional. Inland waters saw a decline by 1 rig and offshore rigs declined by 2 to stand at 72 for US waters overall.

Worst hit in terms of drilling capacity for rigs is natural gas. The rigs for natural gas dropped by 20 and stood at 15686 rigs or the week. The decrease in active rigs would account to a fall in upstream production, particularly from the Texas area. This might temporarily push up oil prices.

HEART and HERO of U.S. Taxation

Earlier, under the Heroes Earned Retirement Opportunities (HERO) Act, signed into law on Memorial Day, taxpayers could count tax-free combat pay when determining whether they qualify to contribute to retirement savings plans. Before this change, members of the military whose earnings came entirely from tax-free combat pay were generally barred from using IRAs (retirement savings plans) to save for retirement.
Hero Act put in simple words means that the IRS (Internal Revenue Service) taxes one category of tax payers to provide exemptions to others. In this case, tax income for regular taxpayers was used to give members of military, whose earnings came entirely from tax-free combat pay, an opportunity to use IRA to save for retirement.

In the context of the HEART Act (Heroes Earnings Assistance and Relief Tax), the proceeds of the tax are used to provide assistance and buffer the revenue loss occurring from exemptions provided to members of the military. The names chosen for such tax laws ensure that the ones not complying have a feeling of guilt and a feeling of treason. This works quite conveniently on the lines of Behavioral Finance that plays on human psychology of Finance.

IRS taxes all US Citizens and Green Card Holders based on worldwide income. This means that as long as you maintain a US citizenship or hold a Green Card, your income in any part of the world is subject to US Federal Taxes. In order to curb people who have high income, from giving away their citizenship in order to avoid getting taxed, the IRA taxed them assuming sale of all their assets over a 10 year period after they withdrew their citizenship. After the HEART Act, such individuals will be taxed in one huge lump sum rather than over a 10 year period, assuming sale of all their assets. This will make it even more difficult to avoid taxes by withdrawing citizenship. The large amount of tax will act as a deterrent and thus High Net Worth individuals will likely not give up their US citizenships or Green Cards.

Obama Plays American Hero

Barack Obama seems to be playing all his cards now in a desperate attempt to ensure the American voters that he is the leader America needs and would be proud of. It kind of sounds like Bush’s cliché use of “Freedom” as the stepping stone for every action. When Obama addressed The Democratic National Convention in Denver, he told the American public that he will ensure that American companies outsourcing jobs outside the US will not get tax SOPS and he would instead provide them to companies who were creating good jobs in America.

The fact is that there are no companies in US that currently get tax breaks for sending jobs overseas so Obama doing anything won’t make any difference. Moreover, for any such act, he would need a Congressional and Senate approval.

What Obama needs to think after getting out of his Superman mode is what the fate America would be if all the cheap outsourced jobs to US, Mexico and Philippines were stopped and the same were rolled back in US. The kind of margins American companies would lose, boil down to an unimaginable number and more expensive goods and services. Mr. would be president needs to understand that America outsourcing jobs overseas is in its own interest. It does do because it needs to do so for the talent and cost arbitrage.

I don’t blame Obama completely. After McCain performed the Guantanamo Bay stunt, Obama had to pull something out of his hat.