On Thursday, April 30, 2009, Chrysler filed for Chapter 11 bankruptcy protection. Tomorrow, Monday, June 1, 2009, GM is expected to file for Chapter 11 bankruptcy protection in New York. This marks the largest bankruptcy filing in the history for an industrial business. This can have catastrophic effects in our financial markets as GM employs 230K people and builds over 20K vehicles per day. Just as when investors thought the market was turning itself around, this can eventually end up testing new lows in our financial markets.
As mentioned in my earlier posts, the auto industry needs to re-structure themselves. It was only a matter of time until the "big" companies fall under. The theory of "too big to fail" no longer exists in today's global market.
Sunday, May 31, 2009
Friday, January 30, 2009
Hedge Fund Transparancy Act
Today, 2 senators, Charles Grassley an Iowa Republican and Carl Levin a Michigan Democrat introduced the Hedge Fund Transparancy Act. This act requires certain private equity funds to register with the SEC. Hopefully, the SEC will be more attentive of any red flags that come in their way unlike the Madoff incident where there was numerous red flags for many years. All the regulation wouldn't mean anything if the SEC doesn't react to any suspicious acts.
I think this act would benefit the public and it is better for overall for the market. Hedgefunds have got so big over the course of the years that they do have the ability to shake the financial markets. Regulating this industry is beneficial not only for the industry but for the investors who invests in the hedge funds. Investors should know what kind of assets the funds are interested in and what is the fair value of these assets.
If this act gets passed, then this would amend the current act of U.S. Company Act of 1940. 2009 will turn out to be a substantial shake-out in the hedge fund industry. This is just the beginning of the process.
I think this act would benefit the public and it is better for overall for the market. Hedgefunds have got so big over the course of the years that they do have the ability to shake the financial markets. Regulating this industry is beneficial not only for the industry but for the investors who invests in the hedge funds. Investors should know what kind of assets the funds are interested in and what is the fair value of these assets.
If this act gets passed, then this would amend the current act of U.S. Company Act of 1940. 2009 will turn out to be a substantial shake-out in the hedge fund industry. This is just the beginning of the process.
Saturday, January 17, 2009
Economy hitting the professional service industry
We all hear what's going on the news and it's pretty dreadful out there. The economy is in the shambles. We all hear what's going on in the financial, retail and auto industries. Banks like Citi are breaking up. Bank of America has issues of their own with their "toxic" assets on their balance sheets requesting for government financial bailout. Layoffs are happening everywhere in the almost every industry.
With the way the economy is going, the professional services industry is getting hit hard. Yesterday, KMPG sent out an e-mail to all their staffs with the following 2 options: the first is to voluntarily take a leave of absence anywhere from 4-12 weeks for 30% of their pay and the second is to move to a 4 day work week with the 5th day being unpaid. Other large accounting firms such as BDO and Grant Thorton also had to re-structure based on the current economic conditions- Grant Thorton announced that they will lay off 225 staffs and 40 partners and BDO said that they will lay off 250 staff members. Law firms and other service providers are also getting hit hard from the serious economic conditions.
With the way the economy is going, the professional services industry is getting hit hard. Yesterday, KMPG sent out an e-mail to all their staffs with the following 2 options: the first is to voluntarily take a leave of absence anywhere from 4-12 weeks for 30% of their pay and the second is to move to a 4 day work week with the 5th day being unpaid. Other large accounting firms such as BDO and Grant Thorton also had to re-structure based on the current economic conditions- Grant Thorton announced that they will lay off 225 staffs and 40 partners and BDO said that they will lay off 250 staff members. Law firms and other service providers are also getting hit hard from the serious economic conditions.
Saturday, January 10, 2009
Will there be more?
We all heard about Madoff and his ponzi scheme. The biggest reported ponzi scheme in the history of our financial markets. The basic theory behind a ponzi scheme is when the investment manager takes the new investor funds to pay out the existing investors who wish to redeem a portion or all of their capital. The fund reports a substantially high unrealized gain which in turn results in a high performance.
In a way, don't most funds that invest in illiquid securities act the same? They have investors coming in and out of the fund but they hold these securities that are not readily marketable and tradable. How do they pay out the investors that wish to redeem if they do not have a large cash position and they invest primarily in illiquid securities? Unless the fund is a plain-vanilla long short hedge fund that invests in readily marketable securities that trades at a primary market, it appears that most funds does not operate that much different from Madoff. It would be interesting to see if in 2009, how many more hedge fund fraud cases would come out.
When Bear Stearns (world's #3 investment house) failed, it was only a matter of time until Lehman failed and Merill got bought out by BoA; then, soon after, the $700 billion federal bailout. Usually when a large event occurs, it's only a matter of time until several others will eventually surface.
In a way, don't most funds that invest in illiquid securities act the same? They have investors coming in and out of the fund but they hold these securities that are not readily marketable and tradable. How do they pay out the investors that wish to redeem if they do not have a large cash position and they invest primarily in illiquid securities? Unless the fund is a plain-vanilla long short hedge fund that invests in readily marketable securities that trades at a primary market, it appears that most funds does not operate that much different from Madoff. It would be interesting to see if in 2009, how many more hedge fund fraud cases would come out.
When Bear Stearns (world's #3 investment house) failed, it was only a matter of time until Lehman failed and Merill got bought out by BoA; then, soon after, the $700 billion federal bailout. Usually when a large event occurs, it's only a matter of time until several others will eventually surface.
Saturday, December 6, 2008
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.
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.
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.
Saturday, November 15, 2008
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.
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.
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