ZAY Blog

If you read the business section of any major US newspaper today, the headline is definitely Geely is buying Volvo for $1.8 Billion.

From Hummer to Volvo, and from iron ore mines in Australia to the oil sand business in Alberta, the Chinese are quietly putting their huge foreign reserves (almost $2 trillion) to what they would consider as strategic assets that are necessary towards building the modernized and industrialized China.

As a Chinese, I am glad to see that the government has finally decided to depart from simply buying US Treasury Bills. After all, basic investment class have taught us that it is unwise to put all the eggs in one basket, especially the basket is being made by a country who is, put it mildly, has many ideological differences with China.

However, it is also unfortunate to see that China is paying some hefty prices along the way. One such example is BlackStone, the American private equity company that China paid $29.605 in 2007. The share was traded at $14.53 on Friday, less than half of the purchase value.

For some reason, the Blackstone nightmare constantly reminded me of the sovereign investment history of Saudi Arabia in the 70s, and more recently, Japan in the early 90s.

I still remember the first time I went to visit the Empire State Building in New York, they were showing a video about the history of the building, which mentioned that it was bought by the Japanese for $42 million in 1991 and then sold back to Donald Trump for less than half of that amount a few years later.

The common part between the Chinese boom, and what happened to Saudi Arabia and Japan is that all countries have an extraordinary amount of wealth. Yet, none have the proper way to manage the wealth.

Yes, with the money, China could hire the best money managers on Wall Street, but just like the same theory why China should not invest everything in T-Bills, a foreign talent simply would not be a good choice.

It is critical, therefore, for China to have its own home-grown investment managers, who are familiar enough with the international market, yet has a good understanding of the needs and the Chinese business mentality and politics.

Only then, China would be a mature investor in the international arena.

The S&P Futures were up yesterday, but closed lower at the end of the day. So it is giving another try today to see if the market could reverse its downward trend and start a bear rally.

However, while the market surged this morning, the ADP payroll reduction report has definitely hit the market hard, with almost a straight decline in the first one hour of trading.

This shows the market is still very sensitive to any news that may offer a gloomy outlook of the current crisis.

Unfortunately, the reality is, the crisis does not seems to come to an end very soon.

Be very cautious in the current market seems to be an advise that everyone is getting, and something that I would definitely agree with. It is difficult to tell when would the decline be stopped, nor when would the market start to recover.

In a very short term though, I do see a likely bounce back from the current lows.

The market is likely to take a break as the reporting of Q4 financials quiet down, and be ready for another round of reports coming up for Q1 2009, which will start as early as May.

Meanwhile, governments are likely to make use of the short gap of time that they have to boost the confidence a little, by offering some even more promising pictures.

One thing not to be ignored, though, is that GM and the other automakers are running out of time in submit a viable plan to continue their survival. If they are unable to somehow prove themselves could remain alive, the market may face yet another huge blow.

Until then, I would hope for the bulls, but in a very cautious manner.

Shares of Citigroup has down 36% at 9:15am EST due to the news of government boosting its stack by converting preferred shares to common shares. S&P futures down 2.1%.

Be ready for a rough day ahead!

I am not sure how many short-term traders were fooled by the market today, but I confess I am one of them, and paid a pretty hefty price for it.

All was set to rise this morning, when the market initially opened. After all, we’ve had some pretty positive news from the Federal Reserve regarding the bank nationalization process, and the momentum from the spike yesterday seems to remain.

Things start to be ugly after about one and a half hour after the market opened, and after almost everyone was thinking that S&P was well on it’s way to 790, if not even test the 800 points level.

Within an hour, the S&P gave up all its gains for the day and finally fell to red two hours later.

Most of the major financial news attribute such a day to the decline in the health sector, which is, most of the time,perhaps one of the most insignificant and stable sector in the S&P index.

However, to me, that is just the market taking back some of the over-zealous buying activities after a day of insanity.

The evidence that the market could no long sustain its gains was pretty evident in the last half an hour of trading on Wednesday, with a 15 points drop.

Unfortunately, the market was still largely in the mood of celebration and S&P futures were traded higher even up to the minute before the market  opened today.

However, for those who were taking a long position today, there is really not a lot to worry about, the market is likely to regain some of the losses today, although without any good news, the chances of hit 800 tomorrow is not quite likely.

For the next couple of days, expect some huge volatility like what happened today. At least till the market start to find a new direction, stay put if you do not want to take huge risk, or keep a close eye to your tick charts if you want to minimize your loss.

The market was a little hesitant towards going up this morning, and I was a little worried because the consumer confidence and home prices data did not look so good. Consumer confidence was the key for economic recovery, which has plunged to the lowest since 1967, when the index was first measured while home prices had the largest drop in 21 years.

However, all fears seems to have erased  and the market bounced back fairly quickly after the Chairman of Federal Reserve, Ben S Bernanke, testified in congress that the recession could end as early as this year.

“Could”, of course, means there may be a “could-not”, but any assuring remarks from the government is something that investors are definitely hope to hear.

S&P ended up bouncing back to above 750 points, which is something that I feared it would stay below or drop further for a while.

However, the question remains:”are we there yet?”

Frankly speaking, I would pay someone 1000 bucks if he could convince me we are definitely at the bottom, and it is a good time to buy some oil while short on gold, a typical bull-market strategy.

The reality is, there are still questions remain to be cleared before the market advance further.

AIG is still in talk with the government to try to spend more money in reviving what was once a giant in the insurance industry (or perhaps spend those money on more luxury holiday resorts).

Citigroup, although far from collapse, remain unclear of the direction that it is heading to in the next couple of months.

Finally, the automakers are talking about merger, but whether they could survive to the day merger happens remains to be a huge question mark.

On top of that, we still have to face the reality that the general public are still in fear of what is going on.

The remarks made by Bernanke, to me, is more like a defibrillator to the economy – the heart will beat for a second or two regardless of who the defibrillator is applied to, live or dead.

However, whether it is the magic pill of revival remains to be seen.

I was literally watched with fear and frustration today as S&P slide down below 750 in the afternoon, and dropped 1% in the final hour of trading.

The last time S&P went this low was in 1997, almost 12 years ago, during Asian financial crisis.

What was really scary to me, this time, is that the market is not reacting based on any news.

In fact, there was news that US government was considering purchase some of the shares of Citigroup, which resulted in a 20% rise in C today.

Not so long ago, Obama just signed the stimulus package into law.

Even before the market was opened today, I bet some institutional investors did not see such a bad day. After all, the S&P futures were going up in the Asian market, and the Dow Jones index went up by more than 70 points in the first half an hour.

This is an indicator that rather than selling out of panic, investors are actually losing confidence on the government in solving the current problems, which means unlike what happened last November, when huge selling pressure built up after the collapse of Lehman Brothers, and quickly disappeared after the US Congress announced the bailout plan for the automakers, the current downward trend may persist for a while.

Furthermore, earlier today, the market was still trying to stay above the support level, only to loss that late in the afternoon with large trading volume. This is usually a sign that the downward trend will continue further.

The next couple of days will be crucial in determining the fate of the stock market for at least the next year or so. If the market continued to slump, there is a reason to believe that we may still be far from the bottom, and be even further from the recovery point.

Until then, I would hold on to cash positions and sit tight.

Today was obviously an interesting day to see on GM and F and the not-listed Chrysler.

The news started to unfold at 9am, when President Bush announced the bailout plan for the Big Three (Big Two rather, since Ford is not asking for money), and the market reacted extremely positive at pre-market, when share price went up as high as 4.80 at one point of time.

Then market opened and within minutes, the share price fell back like free fall before coming back to 4.20 and stayed there for pretty much the rest of the day, and shot up to 4.47 right before the end of the day.

The day was particularly interesting as today is the expire date of all stock options expiring in December, and the market is definitely more volatile than usual despite the fact that it was trading at positive territory for the whole day.

First, my condolence to those owner of the put options, or those who wrote calls. The 3- and 4-dollar strike puts were virtually worthless, if the announcement were made a couple of days ago, there was still a chance of profiting from those puts, but unfortunately Bush just happened to announce it on the exercise day.

What surprised me, in this case, is all those shorters? Don’t they need to cover their positions ASAP? And why the stock is not shooting up as the short interests was almost 50% of the market cap?

Look at Citigroup, their shares were traded at 4 region, but went up to as high as 8.5 after the bailout. Why not GM and F?

My only guess is that the shorters have either shorted early enough to get a really good price, or they simply do not want to realize the loss and hope the price would bounce back a little or hold the short position till March and see if GM and Ford could turn in a reasonable rescue plan to restructure themselves.

However, today’s trading was by no means a good indicator of the perception of investors, since lots of options were exercised right before the market was closed (look at the last five minutes), the real reaction from the market to the bailout package would be in on Monday, when the regular trading resumes.

By then, hopefully the market will react more rationally to the news.

For the past two days, we’ve witnessed one of what I would personally considered as the most hilarious jokes of the year unfolded on Wall Street.

Quick quiz to those of you who are reading this:

1. If a company that has not lost a single cent ever since it went public in 1999, and was labelled the most profitable firm in Wall Street, has reported a quarterly loss, how should the market react?

2. If the average of the analysts’ estimate of the loss is $3.73 per share, and the company ended up lost $4.97 per share, how should the market react (based on either the Arbitrage Price Theory that I am sure every single finance student would know, or simply your guts feeling?)

I guess the most common answer would be the decline in share price.

And that happened to Goldman Sachs yesterday.

And GS rallied 15% yesterday.

It was interesting to see how the helpless financial news reporters say about this. The editors in Bloomberg, after scratching their heads for hours, came up with the excuse that the performance was better than the most pessimistic estimate from an analyst in UBS AG, who was predicting $5.50 per share loss (I bet all those shorters want to beat the hell out of that guy now). (http://www.bloomberg.com/apps/news?pid=20670001&refer=&sid=a6ku8xZK62X0) New York Times, being more political, simply said that it was “in line” with analysts’ estimates (OK, perhaps my English is really bad, but do English-speaking community generally consider miss by 33% from average as “in-line”?)

And the story did not end here.

This morning, Morgan Stanley reported its quarterly loss.

And this time, the average from analysts was 34 cents per share loss, with no estimate more than $1.15, according to Bloomberg.(http://www.bloomberg.com/apps/news?pid=conewsstory&refer=conews&tkr=MS%3AUS&sid=aKpeqFFx_giU)

The results was $2.24 per share loss.

Interesting enough, the share of MS rallied as much as 9.14% at one point of time before closing at 2.3% rise.

Now the most interesting part came, as both Bloomberg and New York Times found themselves in a awkward position that they could no longer explain the reason for such spike.

And their strategy was simple: based on facts. They simply reported the loss with no analysis/explanations.

In front of me is a copy of the shareholder’s prospectus on the Wachovia and Wells Fargo merger.

Put all the excitement aside (since this is the first time I am voting as a shareholder for a legal entity, although practically I do not hold any stock of Wachovia Corp as this point although I held an insignificant portion of Wachovia Corp common shares as of the recording date), I can not help to wondering whether there is any arbitrage opportunity arises here.

On the prospectus, it was stated that the merger was publicly announced on the 3 October, 2008 and the criteria of the merger is that each of the Wachovia common stock will be converted into 0.1991 of a share of Wells Fargo common stock. Using the law of one price, or the no-arbitrage principle, one should expect the common shares of Wachovia to be traded at 0.1991 times of the Wells Fargo stock. However, a simple Excel spreadsheet would reveal that is not the case.

The following table summarized the daily closing price of Wachovia Corp. (NYSE: WB) relative to the daily closing price of Wells Fargo (NYSE: WFC) from 2 October, 2008 to 12 December, 2008:

Average: 0.18468

St Dev: 0.018232

Count: 52

>0.1991:1

=0.1991:0

<0.1991:51

In the 52 trading days of data available, there is only one day that the share price of Wachovia Corp traded above 0.1991 times of that of Wells Fargo, and the average is slightly below 0.1991, at around 0.1846.

In the textbook, we learnt that in this case, the shares of Wells Fargo is overvalued and the shares of Wachovia Corp is undervalued and we should go short on WFC and long on WB.

However, why such “arbitrage” opportunity has existed for so long if, in theory, the market is efficient enough (the market in reality is a combination of semi-strong efficient and weakly efficient) to balance the demand and supply curve?

In my opinion, there are 2 major issues here
1. The uncertainty of merger. Although almost all major shareholders of Wachovia Corp have mostly accepted the fate of the bank, there are still shareholders who are contending for the merger, claiming that the merger has significantly undervalued the firm. It is very unlikely, but still possible, that such lawsuits will cause the merger to fail.

2. The volatility in the stock market: Although the shareholder’s meeting is going to take place on December 23, 2008, the merger is not expected to be completed  on that day. As a result, there may still be volatility in the share prices of both WFC and WB, which could affect the implied values of the shares.

Note that the market was able to quickly absorb the information and the ratio was relatively stable after the initial fluctuation, indicating the market is still fairly efficient despite that there was significant arbitrage opportunity initially even after the announcement was made to public.

However, it was also noted that out of those 52 days, in 44 days both shares went up and down together, hence it is safe to say that the market has indeed absorbed the information of the merger and is currently considering the two corporations as a pair rather than two unrelated stocks. When comparing to S&P 500 index (which is the proxy for the market portfolio), WB was traded with the movement of the market in only 27 out of the 52 days, indicating that is quite independent of the market movement.

Newsflash: The bailout has officially died in the senate as of 11:03pm, as it could not find sufficient number of votes from the Republicans to pass the legislation. Oil have down more than 2 dollars in the past hour and US Stock Futures have gone down for more than 3% tonight.

There will be another dreadful Friday in Wall Street tomorrow, will there be any chance for SDS to hit 130 again?

By the way, it is already impossible to short GM stocks from my broker, and I suspect it should be the same for everyone else as well.

I don’t feel like looking at the market tomorrow, to be honest…