Thursday, March 29, 2007

morning updates... 03 30 2007

features: largest full service brokerage outside NY, $5 bil market cap. A.G. Edward reported higher than expected 4th quarter profit ($1.44 eps vs est %1.04) Profit increased 45% stock: gain 2.9% to $68 by the end of yestesday no bonds or CDS... drivers: asset management and investment banking KKR acquired the first China company: Tianrui Cement Feud between the banks and exchange Eurex future trading volume $42 mil/day OTC $15 bil/day CME, the largest U.S futures exchange, said it would trade futures of CDS from May. CBOT will also enter the market.

Some facts about Bears Stearn Subprime exposure

It is the largest mortgage backed securities originator. Only 3% mortgage business is related to subprime mortgage. It does not keep any of the risk of the mortgages or bonds it originated. It only sell products.

Wednesday, March 28, 2007

morning update .... 03 29 2007

Analysts in NY said that ML may have the most potential for structure-finance CDOs losses . More risky than BS -ML arranged $46 bil (24%) of the structured-finance CDOs market. BOA 11%, Bear Stearns 5%. -ML's profits could be impacted by its acquisition of nation's 10th largest originator of subprime mortgages. -BOA suggestioned trading: sell BSC CDS and buy Mer CDS MER (AA-) 5y senior CDS is at 31.5, BS (A+) 37.8 Citigroup will advise on Bar’s takeover of ABN Ambro. -less likely to bid for ABN due to conflicts of interet -Barclay takes a smart move to remove on rival bidder

CDOs simple introduction learned: 1.structure-finance CDOs are collaterized by the cash flows of ABS 2.different from CBO or CMO, CDO represent different types of debt and credit risk 3.'balance sheet' type of CDOs is to remove the risky assets/loans off the balance sheet 4.collateral can be managed by asset managers, like AXA... 5.only synthetic CDOs has the flexibility to construct Single Tranche CDOs (bespoke CDOs) where the entire CDO is structured specifically for a single or small gropu of invetors. 6.waterfall capital structure can be sequential, pro rate, or hybid 7.collateral usually are non-mortgage loans and bonds. 8.a large portion of equity tranche investors are based in German, where certain funds are not required to value their holdings on mark-to-market basis.

daily notes...03 27

Further news related to subprime... -Moody's will downgrade SOME subprime bonds and CDOs backed by these bonds will be downgraded too.Since the end of 2006, Moody's has cut or warned it may lower about 4.5% of the Baa ratings on subprime bonds. The average rating cut was about 4 levels.$2.5 trillion CD0S, 40% of underlying assets are subprime mortgages, $1 tril might be impacted -Facing the meltdown of subprime market, SEC set up an enforcement unit to investigate the frauds involving subprime mortgage lenders. It hasn't identified companies to be probed. -FASB board agree to give SEC more regulation inputs in governing apointment process. People opinions to the move are divided. Some people think FASB become less indepedent. Other people think SEC should directly appoint FASB members.

subprime comments from S&P analysts

"The subprime mortgages experiencing the weakest credit performance are a small subsegment of this market, and one with the highest layering of underwriting risk. By high-risk layering, we mean the tendency to accumulate high-risk credit factors: A low FICO score (low 600s and below), no income documentation, no asset documentation, no down payment or second mortgage collateral in lieu of the down payment, and a purchase mortgage. This "perfect storm" of risk layering in underwriting subprime mortgages is unprecedented. " We expect a normalization of commercial and consumer losses across all loans... Company diversified across a broad spectrum of the mortgage market, aligned with strong interest rate and credit risk management oversight, will surve. The growth of specialty-finance lenders depends on their acess to capital markets and third party funding, such as mortagae warehouse lines Critical to the keeping these funding lines open are their credit quality and capital strength. Once these

Monday, March 26, 2007

disappointment new home sales on 03 36

Today the next home sales, 848k, was annouced to be below estimate, 985k, and even previous month's next home sales was revised downward. The new home sales has been dropping for months. The credit crunch might be driving down home sales. But the report of next home sales be in conflicts with last week's existing home sales. The conflicting reports might reflect weather distortion. Also reports may reflect shifting buying habits: facing slower price appreciation, more buyers prefer existing homes than next homes. The disappointing housing market may translate into low house price, lower consuming power, more personal bankruptcies. In addition, deterioating housing market might translate into lower needs for loans, impacting personal banking business. Today, S&P forecast the fallout of subprime mortage may impact bonds backed by automobiles loans as people with pooer credit struggle with household debt. Fortunately, majority of subprime auto borrowers are renters, and they are not subject to the vagaries of mortgage market.

Sunday, March 25, 2007

economy update

a slowdown in business invetment will linger long enought to hurt job growth. When profit growth is slowing and margin is shrinking, Amercian business is quick to cut back on expense. A manpower Inc. survey of 14,000 companies this month showed employers plan to slow hiring in the next quarter. Construction companies and makers of durable goods plan to trim hiring most. But globally, increasing business investment in Europe and Japan will offset the slowdown in U.S. Japan is encouraged by low interest rate while European companies are encouraged by expanding econom.

Oracle 3Q earning annoucement - 3 21

Oracle blew past expectations on all counts: database vs application license. It validated Oracle's strategy of expansion through acquisition. Oracle made some tweaks to its sales strategy, cutting the amount of time sales staff spent in meetings and other activities that didn't involve selling. The product in the pipeline will be "Fusion", which aims to combine the best aspects of Peoplesoft, Siebel, and Oracle's own software.

Saturday, March 24, 2007

Intel marks China's assembly shfit

China's economy is moving up the value china, as witnessed through semiconductor sector and China growing car business China realizes labor intenstive business is not sustainable business model. Intel recently plans to build $2.5 billion IC manufacturing plant in Dalian. China's care business has gone from total reliance on imported parts to heavy use of components made and desgined at home. The changes in China might change the world economic landscape. What will concern U.S is shift that China companies are investing more in U.S companies, instead of U.S companies investing in China companies.

Wednesday, March 21, 2007

Fed keep lending rate intact 5.25%

Still economy is slowing down, especially in business sector. Business spending in the fourth quarter was weak. Corporate purchase of equipment and software declined at a 3.2% percent annual rate. Shipments in January of non-defense capital goods exlucding aircraft, a proxy for future investment, slumped 2.7%, the most since september 2001. In addition, fourth quarter earning in S&P technology sector was negative. Relative strong unemployment and housing starts number make the outlook uncertain. Still I believe it is tempoarry, maybe due to warm weather and other factors.

Monday, March 19, 2007

daily notes...03 18

Housing market recovery is not yet at hand. ..Speculation on the way up had led to a glut of homes on the market that couldn's be easily worked through, lax lending standards and lower interest were to blame.. Wakeup! don't get caught up in the idea that housing market is recovering. Finance setctor continued to be haunted by subprime woes... Economy this weeks's interest rate decision will far outweight any other data. It will be on hold among the mixed data. One the one side, employment number is stable and CPI remains high. On the flip side, subprime issues may spread into broader economy. Bondholder Beware Among buyout boom, portfolios of High Grade bonds have been battered. Because some issuers have drafted "poison puts" narrowly, to be triggered by the sale of a controlling stake to a person or a firm - but not a group of firms. Many LBOS are done by a consortia of buyout shops. Some "poison puts" are less toxic than they thought. It is unlikely the companie that issued this debt had mishief in mind. But the debt market's uproar shows how heated its tug-of-water with buyouts shops over corproate value has become...

Sunday, March 18, 2007

Blackstone is going public

The speed of Blackstone's decision is surprising and may reflect the belief of Stephen Schwarzman, Blackstone's co-founder and chief executive officer, that market conditions are worsening. Both Mr. Schwarzman and Blackstone President Tony James have in recent weeks been privately and publicly warning about a turn in financial conditions, especially in terms of their own firm's ability to finance acquisitions via cheap and ever-plentiful financing offered by Wall Street banks. The frenzied demand for the Fortress listing showed investors are willing to pay up to tap into the magic of alternative investment firms. At the same time, though, when markets are volatile, the advantage of going first may be considerable. Blackstone, Carlyle and TPG learned this lesson last year when Blackstone's arch rival, KKR, listed a fund in Europe that would invest in its deals. Demand was so strong that KKR expanded the offer from $1.5 billion to $5 billion. That left little demand for anything that followed, to the frustration of rivals which then abandoned plans to launch similar units.

root causes and magnitude of subprime issues

Someone blame fraud, but less than 0.1% of mortgage application in 2006 were classified as frauds. Furthermore, FinCen found that only less than 1% of mortgage frauds SAR were characterized as subprime frauds. In conclusion, mortgage loan frauds is not a major contributor to recent subprime issues. It is a function of lax lending standards, rising short term rates, and declining home prices. lending standars was low uprfront. When time came for adjustable rates to inrease, many house owners could not afford it. Short term rate has increased from 1% to 5.25%. Desipte the recent seriousness, only 6% of outstanding mortgages are subprime mortgages with ARM, it is unlikely that a major financial shock will ensue. "Richard Brown, FDIC chief economist recently remarked that FDIC insured banks hold about $2.2 Trillion in mortgages, probably with 85% to 90% being prime mortgages. The total size of the mortgage market is about $10.2 Trillion. About $5.5 Trillion have been securitized. The total size of the Subprime mortgage market is about $1.3 Trillion. If 30% of such mortgages default, and banks are only able to recoup 60% of lent monies, that would result in losses of $156 Billion. It is estimated that FDIC insured banks generated about $145.7 Billion in profits in 2006 alone." "The Mortgage Bankers Association notes that 35% of homeowners own their homes outright while 47% have fixed-rate mortgages,” he writes. “Only 6% are subprime borrowers with adjustable-rate mortgages. " although is financial shock is unlikely, the increasing inventory will cause a slowdown in real estate sector. Such a sector slowdown will have a negative effect that will be aborbed by other sectors.

Saturday, March 17, 2007

finance fundamental force

M&A fees have held up, but underwriting stocks and bonds has become less lucrative than it was during the 1990s. Average udnerwrittoing commission for U.S equities feel to 3.8% of a sale's dollar value in 2006 from 4.379% in 1999. Bond underwriting fee slide to 0.434% from 0.491 in 19999. Citigroup dominates the debt makets partly because predecessor Travelers Group bought Salomon Inc. GS is the leader of M&A (deal markers) and equity underwriting (moneymaking) franchise. MS is No. 2. MS trailled GS, also follow the same style as GS. It has set out to boslter asset management unit. It has bought stakes in five hedge funds managers with $30 billion. It plans to divest the vertige of Credit Card unit.

Wall Street is losing its competiveness

None of the 10 largest stock issues in 2006 was listed in NY, even though NY based firms play a roll in all of them. Expensive U.S IPOs. In U.S investment banks charged fees average 4.4% of hte value of stock issues in 2006. In Europe, that average was 2.3%. Geography and time zone are also contributing the changing balance of power. European and Asian market are growing. Europe has grabbed 56% of the $52 of global revenue from OTC derivatives, which aren't traded on exchanges. More banks compete fro IPOs in Europe than in the U.S because European market is more fragmented. It wouldn't be the first time the balance of power tipped in finance. The Dutched developed the first exchange. Then London,...NY.

currency trading...

Euro-Dollar currency trading lost money since 2003 due to the lack of sustained trends. The rangebound behavior of the euro-dollar exchange rate in the past three years stems from two countervailing fundamental forces that prevented dollar from either rising or falling. First, on the negative side, is the deteriorating trend in the U.S. current-account balance. On the positive side is the comfortably wide spread between U.S. and euro-are interest rates. When these two forces move in a tandem, it is a good timing to trade euro-dollar.

Thursday, March 15, 2007

subprime ...continue

Subprime and Alt-A loans account for about 44percent of an $8 trillion mortgage market, Grant said. Alan Greenspan said he expects the fallout from subprime defaults to spread to the broader economy, especially IF home price declines.

Wednesday, March 14, 2007

subprime industry's

The subprime industry's woes have their roots in the tenure of former Fed Chairman Alan Greenspan. the Greenspan-led Fed cut its benchmark rate to 1% in 2003 and kept it there for a year, helping foster a housing bubble. Subprime mortgages almost double to $640 billion in 2006 from $332 bil in 2003.

Tuesday, March 13, 2007

subprime mortage woes...

It relects the fallibility of human beings, frauds...I am seeing it is spreading into other credit products, such as ABS backed by these subprime bonds and CDS supported by ABS. Citigroup accepted last Friday that its funds clients will suffer the loss due to exposure to subprime mortgages. Also, last week high quality ABS AA(?) has seen spread widening. Usually ABS BBB- are supported by subprime mortgages. The movement in ABS AA reflected the spillover effect from subprime mortage. Why? next time...

Wednesday, March 7, 2007


The repor from ADP employment change disappointed investors, leading to a temp slump in the stock market. Stock has snapped a weeklong slump yesterday, Asian...lead the advance...

Tuesday, March 6, 2007

NonFarm Productivity 1.6% and labor cost 6.6% for 4Q in 2006

annualized rate at 1.6%, higher than expected, but down from 3% pace government reported last month. Productivity signals efficiency, having a long-term impact. It is a single feat allowing economy to grow faster without any inflation, helping exporting, and enriching both households and corporations. If it slows, inflation and unemployment will follow. 6.6% labor cost reflects one-time bonus.

Monday, March 5, 2007

HSBC 2nd half earning annoucement

HSBC announced 2nd half earning yesterday. The profits has dropped compared to one year early. But it is still above the earning estimate because gains from Emerging Mkt made up for the loss in U.S loan defaults. Its share price increased 1.1% yesterday. Bond's spreads have widened. CDS price has increased too. In the finance sector, based on ML Index, brokerage companies bonds spreads has widend most, and banking and insurance companies bonds spreads have widened at a much smaller scale.

Thursday, March 1, 2007


Mutual funds had been on a winning treak until they took it on the chin this week in the slide that spread partly from Chins'a stock market. Blogs and chat rooms heated up yesterday with talk of ill-timed investment...