ZAY Blog

Here is an interesting snapshot for SDS for the past 12 months of the year:

The closing price for SDS is way above the 200-day MA, hence indicating a strong buy signal. 

By adding in the volume factor, more interesting things happened, the interest of SDS is at its peak at the end of November, when it was at all time high of 133.20, which is completely understandable. However, the volume then went down and up and down, which matches the price pattern for SDS since the all time low of the stock market. As SDS is reaching a trading volume that is comparable to its lowest price recently (at the beginning of November), one could not stop wondering, is it going to be another opportunity for SDS to go up again?

The graph is equally interesting for momentum traders, with the momentum graph displayed at the bottom of the 3 graphs. The momentum is clearly indicating an upward trend, hence it should be a good pick for the momentum traders as well.

However, the reality seems to tell us that we are having a bull market, hence SDS, as a “short” stock, is coming down.

The fundamentals in the market is still weak, needless to say, but there seems to be an upbeat mood ever since Obama won the election. Besides the fact that the Christmas-effect is kicking in, we have a market that is eagerly waiting for the outcome of the bailout package for the Big Three automakers, which could come at any time. All these could possibly contribute to the unusual upward trend in the overall market and therefore creating a false picture that the market is recovering.

Just thought this is an interesting example for those who are studying for the Investment course in UW, as the final exam is coming this Friday.

Well, not quite, there is still hope that the senate would bring it back to live some times later this week.

However, the collapse of Wachovia, the bank that could be saved if the loan programs have approved earlier, as well as the plunge of the major index around the world, clearly indicated that this is an issue that can not be waited…

How long will the politicians in Parliament Hill figure out that Americans do need to save Wall Street?

I am not saying the traders in Wall Street have done the right thing to use the money that they are not prepared to pay back, however, what is right and what is wrong no longer matters, because Wall Street is not only a financial hub of the world, it is, more importantly, the dominant factor of the US economy. If Wall Street fails, every ordinary American citizens would be affected, not just the traders or the investment bank executives.

Sometimes, I am wondering if democracy is really a great idea in time of crisis, because it is difficult to explain to every single individual (or even the majority) of the impact of certain things, not because general public are ignorant by any means, but rather we are specialize in different things.

For example, it is difficult to convince a farmer whose sole interest is to be able to sell the cattle he has raised that 2000 dollars from his tax money has to be given to the financial market.

He is probably really good with raising cattle, far better than the investment bankers could do, but that does not mean he could be educated enough to see the entire economy.

On the other hand, we can see that in the current milk-poisoning crisis, the Chinese government is spending taxpayers money to compensate the lose of the diary farmers.

This may be a somewhat authoritarian in the eyes of Americans, since every single Chinese citizen (or those who pay tax to the Chinese government at least) is basically paying for something that they have nothing to do with.

However, in this case, by ensuring the survival of the Chinese diary farmers, China has shown to the world that it is acting more responsibly, as well as more maturely, in time of crisis.

Which is very different from the irresponsible manner that the congressmen and congresswomen is showing ahead of the elections.

I was really thrilled to hear that the senate has finally approved the package to save the financial world.

I am not sure how much the collapse of Washington Mutual would have made those senators feel that they finally need to do some work rather than arguing all over the place to maximize their political profit, but the fact that the agreement was reached on Saturday midnight is really an assuring fact to know.

However, what we have seen so far is a really disappointing picture in the Asian market, with the financial stocks continue to decline.

Why is that so?

Because people no longer have any confidence in the US economy.

Sadly speaking, the financial market in US would not stop to deteriorate just  because of the 700 billion. In fact, some analysts claimed that the market needs as much as 5 trillion dollars in order to go through the current mess without getting hurt too much. Unfortunately, the fact that the rest of the world is reluctant in joining the US in saving the financial market means that it is very unlikely the government will be able to raise the fund.

On the other hand, even within the US government, as election approaches, no one seems to have that much interest in asking each US citizen to pay more than 2000 dollars to save the mistakes made by the Wall Street traders. Instead, they have promised tax reduction, which would means that the government would not be able to provide too much to save Wall Street.

However, what should we expect when the market opens tomorrow morning?

First, I think Wachovia is saved for now, after being treated as the next victim after Washington Mutual, therefore, we should see some good news for WB to bring the highly undervalued stock back a little.

Second news should be from the currency market, where we should see some advance in the US dollars as people are now confident that the wound would not be as large. On the other hand, the LIBOR and treasury should be a little lower as the financial institutions (even those non-US companies with large business presence in US) find themselves a little easier to borrow money to solve their liquidity headaches.

Let’s hope that this 700 billion dollars would really be able to give the investors some confidence, because…well, hope is all we have.

The past week is definitely one of the most turbulent times (if not the most) in the financial world since September 11, 2001. With Lehman lawyers rushed to file for bankruptcy and Merill Lynch acquired by Bank of America, as well as the possible failure of AIG, people can not stop wondering what is going on.

However, we did see some hope today when Barclays agreed to buy the North America operations of Lehman, which prevent up to 10000 people from losing their jobs and it seems that Feds has provided emergency loan to AIG so that it is unlikely to be in the same fate as Lehman.

Of course, it does not mean Lehman is far from bankruptcy. In fact, we should hear an official end of Lehman pretty soon since the talks with commercial banks have failed. On the other hand, the 85 billion loan from Feds comes with the condition that AIG has to shed up to 80% of its assets in the next couple of years, which essentially kills the entire firm.

The next question that comes naturally is: what will happen?

Now that Morgan Stanley and Goldman Sachs are the sole survivors of the bloodshed, and Goldman posted a 70% fall in quarterly earnings, it is difficult to imagine those two firms would be able to live long on their own feet. However, the CFO of Goldman has blatantly rejected any thoughts of a merger with the commercial banks, claiming Goldman “can not be funded by deposits”.

What could possibly happen then, is a merger between the investment banks themselves. However, this option is very likely to have regulatory difficulties.

Another alternative is to split themselves to have the “good” banks and the “bad” banks so that the “bad” banks will have sufficient time to wind down the business without causing too much disruption in the market while the “good” banks would continue to be able to sustain a good credit rating and attract the much-needed capital from investors.

On the other hand, in the insurance market, we are very likely going to see a period of adjustment to the entire industry, particularly with the insurance on financial products. New players will involve in the insurance market as insurance companies strive to look for new cash-generating products.

In a short term, of course, it is inevitable that the job markets in finance and related industries will not be that bright. Wall Street alone has lost 40000 jobs this year and they are very likely to fill up the very few new openings in the industry.

We have to see that it is necessary for period of adjustment and the sooner it happens, the better. Subprime mortgage itself was a huge loophole in the first place, just that it was too attractive for the investors to close the hole in the past several years.

In Buddhism, it was said: there is always a time when good deeds will be rewarded and bad deeds would be punished, the only question is when.

I guess now it is the time the boys in Wall Street are punished for what they’ve done.

Probably the biggest news in the IT industry is the recent takeover proposal of Microsoft to Yahoo!.

Yahoo!, not surprisingly, rejected the offer from Microsoft on Monday, and it seems that they have engaged in active discussions with News Group to prevent a hostile takeover from Microsoft.

It actually reminded me of a Chinese movie that I’ve just watched last weekend.

In the movie, a lady quarrelled with her husband and moved out, and she regretted later on. In order to win her husband back, she actually asked a colleague of her who have absolutely no interest in her, to pretend to be her new boyfriend and showed off in front of her husband. Eventually, her husband got jealous and they two become a happy family again.

I am pretty sure that is not the only movie that talked about a scenario like that, in fact, it is pretty typical in many movies that I’ve watched. And right now, this is analogous to the takeover battle between the largest IT enterprises in the world.

Yahoo! was once the best search engine in the world, and ten years ago, many Internet-savvy users (such as myself), dig stuff that we need from Yahoo!. Unfortunately, Yahoo! eventually lost its focus, and when it finally, after many acquisitions and attempts to figure out what this company should do, it it already far behind the new born Google.

As it was mentioned by many information sources, the largest problem with Yahoo! is on its corporate culture, where, just like many other MNCs, does not really foster a sense of creativity. Many wonderful ideas were buried in the bureaucracy, and the company itself has not realized the fact that putting eggs into too many baskets is just as bad as putting all eggs in one basket.

On the other hand, the reason why Bill Gates is the wealthiest person in the world is pretty much because of the fact the Microsoft enjoys a certain degree of monopoly (although everyone in Microsoft would deny that, but how about like 80% of all PCs sold worldwide have Windows in them?) in the operating system and productivity suite. For years, despite the rise of many companies whose unwritten ambition is to take down Microsoft, no one could done that.

Not until Google, who has a search engine algorithm that even other big players in the industry admit that it is at least “one decade ahead of us”, and who have been very successful in providing the GMail services, online productivity suite as Google Docs, Google Spreadsheet and Google Presentation, and with the birth of the Android platform, it is directly putting itself into challenges with Microsoft’s Windows Mobile.

However, Yahoo! is still the second most used search engines in the world with five million Yahoo! accounts, and Microsoft still enjoys the de-facto monopoly in the operating systems.

And I do not think it takes too long for both Steve Ballmer and Jerry Yang to figure that the only way to survive is to be able to combine their strength together.

However, no one wants to sell themselves cheap, and particularly for companies like Yahoo!, who still carries the memory of their glorious past. On the other hand, Microsoft is more like a 30-year-old man who is pursuing a 50-year-old woman, no disrespect, but I think Microsoft will still consider every single penny it pays on top of the 31 dollars per share it offered would be too much for the marriage.

News Group is by no means interested in Yahoo!, although it has acquired companies such as MySpace and so on, because it does not make any sense for Rupert Murdoch to step in the hot battle zone between Microsoft and Google at this point of time, when he does not have the expertise nor the experience after the purchasing Yahoo!.

On Thursday, Microsoft announced the big senior management shuffling to get ready to take over, and rumours is that Microsoft is ready to go again with another proposal of about 35 per share.

So, time for Micro-hoo? Or Ya-soft?

Recently, I’ve been following very closely with the case of Societe Generale and now-infamous trader Jerome Kerviel, who is been blamed for causing close to 5 billion Euros of loss as a result of trading on futures contact.

I was amazed, honestly, by the fact that he was able to, single-handedly (although this is being disputed at the time this article is written), build more than 50 billion Euros position within a couple of years, supposedly went unnoticed.

And he actually made some profit (about 1.4 billion Euros) before taking the big hit due to the recent recession of World economy.

And what he did was strikingly similar to what George Soros, the greatest hedging fund manager and the man who broke the Bank of England, did, back in 1992.. (Well, minus the part of computer hacking and so on).

Both were trading futures contracts, both spotted an arbitrage opportunity that others would probably think that was insane, both were playing around with the tiny margin of exchange rates, and both were building positions that were multiple times of their limit (Soros borrowed most of the 10 billion he used to short sale Lira and Pounds, among several positions that he has hedged against other currencies).

The only difference is that back in 1992, risk management was very little known and since Soros was the boss, he was allowed to take such a risky move.

And George Soros made the right bet, and earned a billion in 24 hours, but the unfortunate Jerome Kerviel did not, and lost about 5 billions.

And George Soros became the most successful fund manager in the world, and Jerome Kerviel become the newest criminal and possibly will be condemned for the rest of his life.

As we all know, large profit will only come as a result of large risk, and from the investors perspective, the higher the profit, the better.

If that were to be the case, why should we hate Jerome Kerviel while we worship (to a certain extent) George Soros?

And the bigger question is: did we, in the midst all the regulations and risk control processes, accidentally “kill” many more potential risk-takers who could potentially become the next most successful fund manager?

To me, Jerome Kerviel is just an unfortunate genius, who, perhaps should be born 20 years earlier.

The sweetiest thing in this world today (to me at least), is to look at the stock for Ambac Financial Group Inc:

Did you see how much it went up today? I am not kidding, it is close to 72% in one day!!!!

And I just said it would go up today.

MBI did a pretty good job today as well, went up by more than 30%.

And that was also the worst thing I had today, because I overslept and rushed to class and forgot all about buying the stock until after 4:30EST!!!!! (Yes, I did not eat in any yesterday because I was busy with some other stuff).

Sigh, I guess that is really fate, if I were not meant to be rich, I would not be……..

For anyone who had an observant eye on the NYSE today, it was an incredible morning.

When the market was first opened, many stock literally plunged down to the bottom before starts to pick up again, particularly the stocks that were heavily related to Asian stock markets, which performed worse than poor yesterday.

One of the examples is PetroChina:

Overall, NYSE performed worse than expected today, and here is the quotes from Bloomberg:

The S&P 500 capped the longest losing streak in almost a year, retreating 14.69 points, or 1.1 percent, to 1,310.5. The Dow Jones Industrial Average decreased 128.11, or 1.1 percent, to 11,971.19, its first close below 12,000 since November 2006. The Nasdaq Composite Index lost 47.75, or 2 percent, to 2,292.27. About five stocks declined for every four that rose on the New York Stock Exchange.

All these were signalling that US, and the rest of the world, is going towards another major economical recession today.

It may be a great time to enter the market, when the prices of all stocks are so low, but when NYSE has performed so poorly today, the impact is definitely going to be larger than previously expected.

However, note that the financial companies have performed well today, with MBIA Inc. being the largest gainer in the market today as a result of the possible victory over the credit downgrading case. In fact, MBIA has a target profit of close to 90%.

Attached is an article from CNN about MBIA.

MBIA shares rally; Barron’s says company ‘isn’t nearly as troubled as Ambac’

January 22, 2008: 10:22 AM EST

BOSTON, Jan. 22, 2008 (Thomson Financial delivered by Newstex) — Shares of mortgage-backed securities insurer MBIA Inc. (NYSE:MBE) (NYSE:MBI) rallied Tuesday after Barron’s, a financial investment news provider, wrote that it finds the current price levels of MBIA’s debt, credit-default swaps, and even it stock to be ‘absurdly’ low.
The stock jumped 26% to $10.72 on volume of 5.1 million. As of Friday’s $8.55 closing price, shares of the bond-insurer were down roughly 54% year-to-date.
‘For one thing, MBIA isn’t nearly as troubled as Ambac because it has far less exposure to really-troubled subprime paper,’ Barron’s said. ‘Also, MBIA has already completed raising, or locked in commitments for the additional capital demanded last month by Fitch and the other rating agencies.’
Barron’s noted that MBIA’s AAA rating seems to have ‘passed muster’ with both Fitch and Standard & Poor’s (NYSE:MHP) even after the latter ran a new stress-test on MBIA’s 2006-vintage subprime exposure using the 19% cumulative default rate.
‘Without Ambac competing for new business, MBIA and other bond-insurer survivors should be able to grow faster and strike more attractive insurance deals,’ Barron’s concluded.
Greg Saulnier
Copyright Thomson Financial News Limited 2007. All rights reserved.

Major stock markets have seen the largest drop since September 11th.

US is not open since it is a public holiday, let’s hope NYSE and NASDAQ will do better later today…