Should the US Govt bail out the auto industry?

Currently, the US auto industry is in the brink of failure. GM is the most immediate of the 3, needing $4 billion before the end of this month and $15 billion by the end of 1st Quarter 2009. Chrysler is next by admitting the need of $4 billion by the end of the 1st Quarter of 2009. Ford is not in need of immediate cash; however is afraid of speculation once GM and Chysler goes.
It would be scary to see GM go under. However, the auto industry had brought this to themselves. I do not think the US Government should help them out. The auto companies got themselves into this mess - primarily with poor management. I understand the economic ramifications (ie: unemployment, foreign trades, etc.) of the US auto companies going bankrupt, I think helping them now will only hurt us in the long run. If the governement bails them out now, then they will continue their poor performance. The US auto industry needs to completely re-structure themselves.

Take the "hedge" out of hedgefund

For the most part, it has been a terrible year for the financial markets. Hedgefunds came out a long time ago and it is suppose to target the high networth and institutional investors. The general strategy (for the most part) was suppose to sustain losses against the equity markets- hence "hedge". What happened? The equity market took a huge blow this year and it looks like there is more to go before we reached the bottom. In the alternative investment world, it looks similar. How did this happened? How can a fund that hedges against the market go down with the market? Apparently, many investment managers took the word "hedge" out of hedgefund and started to high correlate themselves with the equity markets and highly leverage themselves to inflate their portfolios which is one of the many reasons for our current economic crisis.
For 2009, I'm expecting a substantial shake-out in the hedgefund industry. I think most of the funds that lost the meaning of a "hedgefund" will close down, if they had not already done so. In the next several months, many funds will continue to close down. However, as a result, the funds that still stands at the end will prosper. In 2009, I'm expecting a new evolution in the hedgefund industry.

Steve the turkey

I knew a prop trader back in the days when I used to work for a brokerage house. Let's call him Steve. Steve was a prop trader and seemed to be doing very well for himself. Over the years, he seemed to be doing better and better. A couple of years ago, he decided to trade at his attic where he was the proud owner of a 4 bedroom luxury house in Beverly Hills with a Ferrari sitting in front of his driveway (one of his many luxury cars). I spoke with him every now and then and he would tell me about his trading strategies and how it's impossible for him to fail and that the risk of his portfolio crashing is practically none. Recently, I found out that he was bullish on Bear Stearns back in March and his portfolio was highly leveraged. Well, he blew up. Those who don't know what it means for a trader to blow up- it is when a trader loses substantially more than expected to the point where it's not recoverable. Steve never saw this market coming and he never expected this to happen to him. And this is not just Steve; more and more funds are closing down as well. More and more traders reached the point of exhaustion in their trading career, that they are now pursuing something less risky. One of my friend went back to school and the other opened up a restaurant.
When a turkey is being prepared for Thanksgiving, the turkey is fed multiple times everyday. From the turkey's point of view, he must think that life is good and humans are nice. He wakes up every morning and humans feed him. Little does he know that the more days he is getting fed and getting comfortable with humans, he is 1 day closer to getting killed and ready to be served on someone's dinner plate.
Many people including my friend Steve is no different than a turkey that's close to Thanksgiving. He made a lot of money while leveraging; little did he know that this eventually created a bubble of it's own.

Life Settlement funds

With the market going the way how it has been these days, many thoughts have gone through my mind. The equity market is down, our government is stepping in the capital markets funding financial institutions as well as individuals and the list goes on and on, the hedge fund and private equity industry has posted their lowest returns in 10 years, and even the global market is taking a substantial hit with the nikkei reaching it's 26 year low.
The secondary market for life insurance recently started in the late 1990's and is growing rapidly. Life settlement is when an individual sells their life insurance policy for less than face value. A life settlement is the sale to an investor (3rd party) at an amount in excess of the contract's cash surrender value, but less than the death benefit. The good aspect about this investment is that you know the face value that you will receive from the policy, but you do not know the "when" and the "how". Since you are betting on the life expectancy of the individual who sold his/her life insurance, you do not know when he/she is going to die and you do not know how much you will make or lose in this process.
However, especially with today's volatile market and with all the negative news, many savy investors have ventured into the secondary market for life settlement funds as another source of investment. These investors realized that if they bought these polices for significantly more than the insurance company's cash surrender value and paid the premiums, the policy payout amount at the death of the insured individual should result in a profitable return. Most insurance companies do not default on paying out death benefits. Also, regardless of the market conditions, life settlement policies appreciates in value every year since the older the insurer is, the closer the investor is to receiving his payment. This seems like a viable source of investment in today's market and seems to be growing more in popularity. Life settlement investments started roughly 10 years ago and is expected to grow 10 fold to $160 billion within the next several years. It is something to think about while our 401(k) is losing double digits every quarter and our portfolio is rapidly decelerating as well- that is if the brokerage house hasn't closed our account yet.

Should the Governement step in?

Given the economy of how it is, the government has stepped in several times to help stimulate the economy. Earlier this year, the US Governement mailed out almost $100 billion in tax rebate checks which did absolutely nothing for our economy. If anything, the market rapidly declerated more shortly after the summer.
Over the past several weeks, the US Government has been implementing a plan to stimulate our economy. Many financial institutions have sufferred substantial losses from the market turmoil and thus Congress recently approved a $700 billion bailout plan. Of the $700 billion, $250 will be injected into the large banks such as JP Morgan Chase, Citibank, Bank of America and Goldman Sachs in the form of preferred stock. The other half of the money will go into the smaller US banks. The purpose of this is for the government to invest in the US financial institutions which according to them are claiming should not be an expense but rather an investment in the long term. In my opinion, it is the taxpayer who will be paying for this. I oppose the idea of the government stepping in and taking over the capital markets. Over time, the market will turn itself around and the idea of governmental aid will only harm the US economy in the long run. It's amazing how the government stepped in to help out the US businesses- starting with Bear Stearns, Fannie Mae, AIG, the tax rebate check, and now the $700 billion stimulus package. Our government doesn't even have the funds to cover all this. The Central banks only have around $40 billion. That's not enough to cover the FDIC in the banks. That's not even enough to buy Merrill Lynch.
The market will dip more for at least another year and possibly couple of more years until it turns itself around. The government should let the capital markets handle its own crisis.

Have we bottomed out?

I've been away on vacation for a couple of weeks, came back home and ended up sick at home for a week and a day at the ER. While I was on vacation, the following major events happened:
1. Lehman filed for Chpt. 11.
2. Merrill Lynch is sold to Bank of America
3. AIG is tanking and received an $85 billion loan from the Fed
4. Washington Mutual - making it the world's largest savings and loans failure in US history.

This is some scary stuff that is happening to our economy. What makes it worse is that I do not think we have bottomed out. 3 of the 5 largest investment houses failed in less than 6 months (Bear, Lehman and Merrill), the largest insurance company (AIG) needed financial assistance and the we had the failure of the biggest savings and loans instituation (WaMu)- all in a matter of 6 months! When events like these occur, there are ripple effects. I was talking with several of my friends who are in the real estate industry and they recently attended a conference about a month ago. They told me that there are still plenty of home out there that are not officially "foreclosed" yet; however, are at the brink of foreclosure. This means there is more to come. I think there is still more downfall left until we have officially bottomed out.

Which is the next investment house to fail? 3 of the 5 largest could not make it. Who's next for 2008 and through 2009? Goldman Sachs? Morgan Stanley?

WaMu failed. Who's next?

Did the Fed take too much on their plate by taking $30 billion of Bear Stearn's securities, Fannie Mae & Freddie Mac, and now by taking ownership and control of AIG by lending up to $85 million?

Will Lehman be the next Bear Stearns?

Lehman Brothers has been the hot topic the past several months after the fall of Bear and especially within the past recent weeks. Investor speculations drove the stock price of Lehman down. Bear Stearns was the first to fall and there are many more to come. With the fall of Bear, there are going to be many ripple effects. With all the fundings and back office support to many businesses provided by these large investment houses, the worst have yet to come.
Lehman reported it’s biggest loss in over 150 years. The company posted a $3.9 billion 3rd Quarter loss on $5.6 billion write-downs. The stock which was trading a high as $67.73 as the past 52 weeks opened today $4.47. Lehman has also announced that it wants to sell a large majority stake - 55% of its investment-management unit which includes the Neuberger Berman asset-management business. This private equity side of the business is worth about $30 billion and included in this business are Venture-Capital investments, Lehman’s Merchant Banking and Infrastructure investment vehicles Real Estate, and Credit-related investments. Lehman wants to sell off 55% of this stake leaving them with only 45% of the future returns from their private equity deals. There is a lot of pressure on Lehman to raise capital to stay float. In this market, there doesn't seem much relief in sight.

Hedgefunds & Private Equities and their role in the election.

This election should be a very interesting one. Last year, there was a proposal by a Democratic lawmaker that the carried interest would be taxed at 35% the corporate tax rate rather than the current 15% at the capital gains rate. Hedgfunds and Private Equities have been under heavy scrutinty the past year and will be the center of many debates. In turn, the funds have been lobbying large amounts to their respective parties. Either way, when it comes to creation of a tax code, there will be winners and losers. With the current market condition, many funds are already having a their roughest year posting postive returns; now, imagine having the carry taxed at a significant higher rate. In addition, Joe Biden, a Democratic primary mentioned that there is a need for more "transparency" in the private equities and hedgefund industries. This is exactly what needs hedgefunds need in the time where they are posting their worst performance numbers. Many funds are already in the process of closing down their funds. This election should be an interesting one especially with the spotlight on the hedgefunds and private equities. Let's see how the market will react.

Hedgefunds losing their luster.

When most people think of hedgefunds, they think of investment vehices for affluent investors and/or institutions and the investment managers running the portfolio must be a genious to come up with a full-proof trading strategy to come up with respectable returns of around 12-20% on the average for the last several years. The market has changed the past year especially in the hedgefund industry after the downfall of Bear Stearns who provided back office support as well as funded many of the funds. With the rising credit crunch crisis, foreclosure crisis, tumbling stock prices, and and rising unemployment rates there has not been much signs of relief for many hedgefunds resulting to one of the worst years ever. Many funds have posted significant lower performances. Since most funds charge a 20% performance fee on top of the 2% management, many hedgefund managers took a huge pay cut since funds have posted their lowest performances. Since most funds have posted losses or very small returns, the 20% performance fees have not been much compensation for many hedgefund managers. Many industry experts are expecting many funds to close down, especially the smaller funds. Many investors lost their confidence and are in the process of redeeming their investments from these funds. As a result, many fund managers are forced to sell their positions to rebalance their portfolio to compensate for the increase in redemptions. This in turn will eventually force many funds, especially the smaller ones to close down. It has been a very dreadful year. However, hedgefunds were designed for affluent investors to risk adverse against the market in the down market. Apparently, this has not been the case. The rapid deceleration of the market forced many hedgefunds to lose their luster.