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US Bailout Fund Gamble

Tuesday, September 23rd, 2008
by Sck

Author: Australasian Investment Review

So now we have the mega US government fund that will save the markets from imploding. It has stopped the rot in sharemarkets, but credit markets remain wary and uncertain. But for the time being, we have to assume that the bailout is going to work even if it could allow some of the folk who caused the current crisis to keep ducking reality and avoid taking their lumps. So it’s no wonder there are mutterings about the fates of Lehman Bros, Merrill Lynch and AIG: the usual collection of opportunists and lurk merchants want to know why the bailout came Friday and not last Sunday when Lehman failed, and then AIG was taken over and Merrill Lynch sent hurrying into the embrace of Bank of America. Lawyers are being assembled and loopholes looked for. So the cynics and smarter investors are asking who gets to bear the cost in the long run. The answer is the American taxpayer is the only one who will pay. So the poor American taxpayer who have already lost their homes in three million cases; faces that prospect in millions more; are losing their jobs (an extra 610,000 so far this year), will now having to support stumping up $US700 billion, and well over a $US1trillion if the costs of early support moves are added in. What about shareholders and managements of the institutions being supported by the Treasury plan? The plan will be rightfully extended to foreign institutions which hold these dodgy securities (That includes the likes of Barclays in London and Deutsche Bank in Germany), so what also about their management and boards? On all the evidence so far, it will do nothing to help end the root cause of the problem, the continuing decline in US home sales, new home starts and house prices. Until that happens, the cost to the US Treasury and to US and other financial groups will continue to escalate. It’s going to do nothing to stop that, or change the direction of the US economy which is sliding towards an increasingly nasty looking recession. An announcement is due from the US government shortly, led by Treasury Secretary Hank Paulson, Federal Reserve chairman Ben Bernanke and US Congressional leaders, detailing the final agreement and the scope of the legislation for the fund. The fund will be around $US700 billion, but that considerably underplays the true cost of the debacle so far. Since March Mr Paulson and Mr Bernanke have spent $US29 billion guaranteeing the bailout of Bear Stearns, $200 billion at least on the bailout of Fannie Mae and Freddie Mac, $85 billion on the bailout of AIG (the big insurer which wrote credit default swaps on a range of debt that it had no idea about) and at least $US50 billion guaranteeing money market funds. That’s $US364 billion. Seeing financial institutions around the world have already written down or lost over $US500 billion (and have raised around $US360 billion in new capital), the cost so far of the debacle that started with dodgy subprime mortgages and associated credit derivatives is well over $US800 billion (including Fannie, Freddie IAG etc). If the $US700 billion is for new purchases of bad securities (and it could be extended to non-US groups at the decision of the Treasury secretary), the cost will balloon. That will allow the likes of Deutsche Bank, UBS, Credit Swiss and French and UK banks to unload their dodgy securities in certain cases. Assuming that the $700 billion is spent on new securities, the cost could be well over $US1.1 trillion, excluding already announced losses (and over $US1.6 trillion if they are included). Remember that a lot of analysts and commentators, plus bankers and their mates laughed at the International Monetary Fund when it said earlier in the year that the losses could be $US1 trillion. It was obviously very conservative. We are yet to see whether the debt to be bought will include non-mortgage related debt, say CDSs (Credit Default Swaps) and other dodgy credit derivatives issued over the debt of groups like General Motors or healthy US or foreign corporations’ debt. Will it include leverage buyout debt for the likes of private equity groups like Blackstone, KKR, CVC and the like? And on top of all the spending so far on the likes of Bear Stearns and AIG, there’s the $US500 billion spent or being spent a day by the Fed funding the markets in the US, Europe, Japan, Canada, Switzerland and other areas. There’s the $US180 billion swapped last week, there’s the monthly $US200 billion being lent to banks and other groups in the US each 28 days and there’s the daily $US33 billion being injected into US commercial banks each day and the $59 billion primary dealers last week (investment banks). Even in a US economy that produces $US14.4 trillion worth of goods and services a year, that’s a lot of loot. In fact a working paper from two IMF economists estimated that banking crises chew up an average of 16% of the GDP of an economy. That’s based on looking at 42 major banking crises around the world from 1970 to 2007 (and not including the current problem). Spending all that money will intensify long-standing questions about America’s fiscal health, possibly at the expense of another drop in the value of the dollar. No wonder the US dollar blew out on Friday, sliding to over $US1.44 on the euro (the Australian dollar rose by more than 1.5c in offshore trading on Friday night). To mitigate the cost and make for a more brutal (to the selling groups) and equitable arrangement for US taxpayers, the purchases could be made by the US Treasury through a bidding process. Companies that want to offload their dodgy assets would bid to sell to the government at a huge discount. The company willing to sell at the lowest price wins. That’s a reverse auction. The government would then be able to sell the assets back into the market when it wanted: the government could give the banks a share of the upside if there are any profits. The Fed lent that $US85 billion to AIG at a margin of 8.5% over the rate banks lend to each other internationally (so-called 3 month LIBOR). That’s around 11% or a bit more in normal times outside of last week. Using that as a yardstick, the pricing by the Fed could be brutal indeed. So far it seems like the purchases will be aimed at dodgy housing-related debt of varying kind, but you can bet there will be pressure to offload corporate and buyout loans that are going bad. The property related debt specified in the proposed bill is residential (AND) commercial. That alone will limit the Fund’s ability to concentrate solely on residential debt. And what about personal loans, credit card and car loan debt tied to foreclosures and home equity loans which is another disaster area? The idea seems to be that the US government will buy at below-market rates and sell for a gain when the housing market recovers: when that will happen, no one is willing to say. The problem is that the dodgy housing-related assets have proven extremely difficult to value as the demand for them has disappeared. And there is a nasty message there: those banks and financial groups that stayed away from this sort of toxic debt are being punished. The incompetent and imprudent will be rewarded by being bailed out. This is what moral hazard is all about. The strong stock-market rally late last week reflects the belief that companies have been saved from the cost of making dodgy decisions on these loans from incompetent and risky decisions to speculate and gear balance sheets to generate big earnings for the company and themselves. The inevitable death of weaker firms will be delayed, and in turn that will delay the reckoning that must occur before a sustainable economic recovery can take shape. The US government is seeking to eliminate legal challenges by making the Treasury the sole and final arbiter and not allowing any legal challenges, a move that has upset Americans in the legal field (naturally). While the proposal calls for the purchase of as much as $US700 billion of bad loans, it’s unknown what taxpayers will ultimately pay for the bailout. The Bush administration’s proposal requests that the US Congress authorises an increase to America’s debt ceiling. That’s set to rise to $US10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009, to accommodate a Federal Budget deficit already estimated at some $US580 billion. But now the Administration wants to lift the ceiling to $US11.315 trillion to allow for the purchases of these dodgy mortgage-backed assets. US commentators say that it’s unclear at this point if it will help homeowners. If the Treasury buys an entire securitized loan, it could help struggling homeowners by modifying the terms. This could include reducing a loan’s interest rate or principal balance to help prevent foreclosure. But if it doesn’t buy all the securities. It could be held to ransom by the other holders. The bottom line remains: if the plan doesn’t stem the tide of foreclosures, home prices will not stabilize and the economy will not recover and banks and other financial groups will still be on death watch. It will not help them lend more money for housing business, credit cards and the like.
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Australasian Investment Review (AIR) is a free daily news service covering global financial markets with a focus on Australia, New Zealand and Asia. Each day our team of experienced journalists presents you with a concise digest of expert opinions and analysis on trends and backgrounds that matter in these markets. Subscriptions are free at

10 tips to earn like Warren Buffett

Monday, May 12th, 2008

“An investor needs to do very few things right as long as he or she avoids big mistakes.” Warren Buffett

One of the world’s most successful investors, Warren Buffett is the richest man on earth. Chairman of the Berkshire Hathaway, Buffett’s wealth jumped by $10 billion to hit $62 billion during 2007. Buffett’s life is an encouragement for investors across the globe.

So what makes the world’s wealthiest man so rich? Buffett believes that successful investing is about having common sense, patience and independent research.

A look into Buffett’s simple, yet intelligent mantras for investing and minting millions.

1. Focus on not losing money rather than making it. Don’t own any stock for 10 minutes that you wouldn’t own for 10 years.

2. A frugal billionaire Buffett believes in straightforwardness. He advises investors to take easy decisions. Never buy when you are doubtful. Invest only if you understand the businesses well.

3. A proponent of value investing, he believes that one must take decisions on his own. He doesn’t believe in listening to analysts or brokers. The best investing decisions come from oneself.

It is not necessary to do extraordinary things to get extraordinary results.

4. Buffett advises to invest in ‘old economy’ businesses, companies, which have been around for fifty years and will continue to have a long innings.

5. We have often heard of people suffering heart attacks when markets crash. Well, Buffett advocates a sound temperament for stock market success.

6. You don’t need to be a genius to succeed in the stock markets. People who can stay cool will succeed in the long run. Always keep in mind the hidden costs, from commissions on active stock trading to high mutual fund fees.

7. Buffett always looks at businesses he can understand; look at the profits in the past, long-term potential of the company, good top level management of the company and companies that have a good value proposition. The strategy is to think about the business in the long term.

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”

8. Invest in businesses with great management. Always keep a track of the management of the company. The top decision makers have a lot to do with the company’s performance.

9. One of Buffet’s biggest strengths is independent thinking. Many people go by what the experts says or what others do but belief in one’s own judgement is the key to stock market success.

10. Patience pays, says Buffet. He says one must not worry too much about the price of the stocks. What’s more important is the nature of business of the company, earnings capability and its future potential.

Good investors never rush to make money. They give time, thought and work on investment decisions. The mistakes that others make should be a lesson for you.

10 Most important rules of Stock Market

Thursday, May 8th, 2008
by Sue

Keep in mind, you cannot have your bread and eat it too. Saving and consumption do not go together. You need to plan today for the lifestyle you want after tomorrow, i.e. the finances you will require after you retirement and etc.. Accordingly, save the necessary fraction of your income to invest in equities. Equities, or stocks, may appear risky, but they are just volatile, they go up and down, and time is the perfect hedge against volatility.

Rule No 1: Plan for future, begin today. Start saving for it now! Stagger your investments throughout your earning phase. Invest on a regular basis and invest for the long term to buy in at an average price that includes both markets’ up and down ticks.

Never wait until you have large amounts of money to invest. However small the amount you are able to save, start early. The earlier you start, the better are your chances of making huge wealth. Remember to make great gains. Time is a crucial factor, as wealth creation is a factor of both the power of compounding and the returns on your investments.

Rule No 2: Start early so that the power of compounding begins sooner; time is the magic that converts pennies into dollars. In exuberant phases, when we have earned good money from our investments, most of us get greedy, and derivatives and futures provide an outlet for the expression of human greed. While such instruments often satisfy the whims of human greed, if taken to unrealistic levels, irresponsible investment in these securities can lead to financial ruin.

Rule No 3: Do not leverage, it is difficult, if not impossible, to predict short-term trends.Buy markets, not stocks. We all know that our economy is in a secular phase of prosperity and the stock market is the best proxy for the growth of an economy. To benefit from our soaring economy, buy the market as a whole and not any single stock.


Rule No 4: Buy stocks that mirror the broader indexes, but never buy a single, or a handful of stock exposures. This means that you need to spread your risk across various market segments in the event a particular stock does not perform for reasons beyond the company’s control. It is easier to predict company earnings, but difficult to predict stock prices of the same company in the short run. Ironically, over the long term, stock prices mirror growth in a corporation’s earnings.

Rule No 5: Look at company earnings, not at stock prices. Stock prices may tempt or give the wrong impression of a company’s welfare. But to build real wealth in equities, you must always rely on declared profits and facts, rather than make decisions based on stock movements. We all tend to sell stocks when we have made profits and keep the ones that have not appreciated. Eventually, we end up holding a portfolio of companies that are not performing! It is only human to sell for profits and not to want to take losses. Hence,

Rule No 6: Keep the winners, sell the losers. Stay on top of your investments. Check constantly for stocks that are not performing and eliminate them from your portfolio if the outlook does not seem promising. This way, you will have all winners left in your portfolio to take you to your goals. In good times, we all tend to believe that the good times will last longer than they actually will. And before D-day, we will be able to sell our investments that were bought at unjustified levels. Just then, it happens that the markets turn and before we can sell out, we are left holding the bag.

Rule No 7: Avoid being the “Bigger Fool;” it is imperative that you recognize the difference between price and value. Buy value and not momentum. When investing in stocks, your head should prevail over your heart. Resist the urge to get consumed by market chatter. Ignore hot tips from dealers and friends. It is advisable to do your own home work. As the result.

Rule No 8: Select stocks with your brain, not your heart. Large-caps are the ones that have already proven themselves over longer periods of time and have the balance sheet acumen, strong cash flow and brains to manage businesses effectively according to prevailing situations and realistic opportunities available.

Rule No 9: Choose large-cap stocks to small- and medium-caps. Investment in small and mid-cap stocks requires expertise and strong tracking abilities, that without, your portfolio will under-perform. Do not short sell a stock just because it is going up, and thus, one day it must come down. Newton’s law is not applicable to the markets. What goes up does not necessarily come back down! If companies are able to sustain earnings’ growth for long periods, then its stock may go up, up and up, or it can even remain high without any reason for a long period of time. Because of this,

Rule No 10: Markets can remain absurdly up, or continually climb for the right reasons. Therefore, never go short. It will expose you to unnecessary risks.

Learning from Warren Buffett-Richest person in the world

Friday, May 2nd, 2008

Age: 75

Fortune: self made

Source: Berkshire Hathaway

Net Worth: 42.0

Country Of Citizenship: United States

Residence: Omaha, Nebraska, United States, North America

Industry: Investments

Marital Status: widowed, 3 children

University of Nebraska Lincoln, Bachelor of Arts / Science

Columbia University, Master of Science

Warren Buffett is the richest man in the world. Nicknamed the “Oracle of Omaha,” Buffett is renowned the world over for his Wall Street savvy and entrepreneurial management skills. Son of a Congressman and stockbroker father, Buffett sold newspapers as a child and re-sold bottles of Coca Cola to his boyhood pals for a profit. His business education paid off: eventually he became one of the largest stockholders of the soft drink company.

Buffett began learning about management and investing from his father long before his 10th birthday. At age 13, Buffett filed his first 1040 income tax form. He reportedly claimed as a deduction the $35 purchase of a bicycle to facilitate his paper route.

Buffett set up Buffett Partnership Limited, an investment management firm that he operated from his bedroom. It was when Buffett bought 49% in a failing textile manufacturing firm, Berkshire Hathaway, which he garnered working capital to invest toward unparalleled success in Wall Street. His self-described management style is that of “capital allocator.” Today, Berkshire is one of only seven companies in the nation that enjoys the AAA rating from Moody’s. It owns profitable subsidiaries including Fruit of the Loom, GEICO Direct Auto Insurance, See’s Candies, Borsheim’s Fine Jewelry, and more.

At Present

Buffett becomes the richest man in the world according to Forbes, dethroning Bill Gates, who held the title for several years.


In June 2006, Buffett gave around 10 million Berkshire Hathaway Class B shares to the Bill & Melinda Gates Foundation (worth approximately USD 30.7 billion as of June 23 2006) making it the largest charitable donation in history. The foundation will receive 5% of the total donation on an annualized basis each July, beginning in 2006. Buffett will also join the board of directors of the Gates Foundation, although he does not plan to be actively involved in the foundation’s investments.

He also announced plans to contribute additional Berkshire stock valued at approximately $6.7 billion to the Susan Thompson Buffett Foundation and to other foundations headed by his three children. The bulk of the estate of his wife, valued at $2.6 billion, went to that foundation when she died in 2004.

His children will not accede to a significant part of his wealth. These actions are consistent with statements he has made in the past indicating his opposition to the transfer of great fortunes from one generation to the next. Buffett once commented, “I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing”

Quote by Warren Buffett

“I don’t have a problem with guilt about money. The way I see it is that my money represents an enormous number of claim checks on society. It’s like I have these little pieces of paper that I can turn into consumption. If I wanted to, I could hire 10,000 people to do nothing but paint my picture every day for the rest of my life. And the GNP would go up. But the utility of the product would be zilch, and I would be keeping those 10,000 people from doing AIDS research, or teaching, or nursing. I don’t do that though. I don’t use very many of those claim checks. There’s nothing material I want very much. And I’m going to give virtually all of those claim checks to charity when my wife and I die. “(Lowe 1997:165–166)

Fast Money Making Tips

Thursday, January 24th, 2008
by Sck

Top 10 strategies for fast profit

  • Invest in Tax Liens

fast money tipsBuy liens placed on properties by municipalities because owners have fallen behind in paying their property taxes. Then, when the property owners pay what they owe to the municipalities, receive not only a return of your principal but also a penalty interest rate set by the municipality, typically in the range of 8% to 25%. If the property owner defaults altogether, take possession of the property for a fraction of its real value: the sum of the back taxes you’ve already advanced. You can then sell the property, even a bit below its market value, for a huge profit.

  • Buy Real Estate Below Market Value

Identify real estate sellers who are willing to accept less than their property’s full market value for a variety of reasons. Then resell the property immediately at a profit, rehab it, rent it out, or even live in it yourself, all with the built-in financial cushion of having purchased the property for far less than it is truly worth.

  • Invest in Income Trusts and Master Limited Partnerships

Earn high yields of 8% to 13% by investing in trusts that extract or transport natural resources such as oil, gas, coal, or timber. Such trusts pass a large amount of their earnings directly to investors through monthly dividends. Depending on the trust or MLP, some of the distributions may be considered a tax-free return of capital, boosting your after-tax return even more.

  • Invest in High-Yield Stocks

Invest in stocks with stable businesses that pay dividend yields of 5% to 15% or more. Some industries offering such high yields include electric utilities, oil tankers, and real estate investment trusts, and several broad-based closed-end mutual funds. This is a way to make your capital compound with very little risk when you reinvest the dividends or to boost the income you live on if you take the dividends in cash.

  • Enroll in Dividend Reinvestment Plans

Invest in companies that offer Dividend Reinvestment Plans, known as DRIPS, which allow you to use dividends to purchase shares directly and thus bypass brokerage fees. Automatically reinvest dividends back into further stock purchases, thereby compounding your portfolio’s assets over time. Several companies offer discount DRIPS, meaning that you get an additional 2% to 5% bonus every time you reinvest dividends, compounding your return even more at no additional cost to you. So if you get $100 in dividends, you receive $105 worth of stock when you enroll in a 5% discount DRIP.

  • Use Put and Call Options

Rather than buying and selling actual stocks or stock indexes, you can, for a fraction of the cost, trade rights to buy and sell those stocks or stock indexes at specific prices within a specified period of time up to two years into the future. This form of leveraged trading allows for far greater gains but also runs the risk of far greater losses than normal stock investing. It is therefore imperative to follow careful strategies that limit risk while optimizing profits.

  • Profit from Foreign Exchange Trading

Trade one currency against another currency, on the expectation that the currency you’ve bought will gain in value relative to the one you sold. This provides a convenient way to profit from the decline of the US dollar against most major foreign currencies.

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