Wachovia taken over by citigroup

Latest news from citigroup was to be take over wachovia for $2.2 billion.
Quote: As part of all-stock deal, Citi will acquire deposits, loans from nation's fourth largest bank. Citi also to raise $10B in stock sale, cuts dividend.

link: http://money.cnn.com/2008/09/29/news/companies/wachovia_citigroup/index.htm?postversion=2008092910

2 other news that occurred for european banks:

Fortis has been suspected as going to be bankrupted and has been bailed out by a few nations.

Quote: European financial giant Fortis partially nationalized. Three governments to pour 11.2 billion euro ($16.4 billion) into the bank.

Link: http://money.cnn.com/2008/09/28/news/international/fortis_nationalized.ap/index.htm?postversion=2008092818

In Britain, Bradford & Bingley is another victim.

Quote: In Britain, the government nationalized its second bank this year, taking over Bradford & Bingley's £50 billion ($91 billion) mortgage and loan books and paid out £18 billion ($33 billion) to facilitate the sale of its savings business, including its entire retail branch network, to Spain's Banco Santander.

link: http://money.cnn.com/2008/09/29/news/international/Europebanks_bailout.ap/index.htm?postversion=2008092911

That pretty much sums up the whole day. Will asian banks be spared of this? The only thing I felt sad for was the graduates that are going to complete their banking and finance degrees or masters soon. It's pretty much clear that the golden era of investment banking might be over.

The credit crunch till today

How has it impacted the big commercial banks in US till date? Just some flashbacks:



Some abstract:

Still, J.P. Morgan is weathering the crisis far better than its rivals. From July 2007, when the cyclone began, through the second quarter of this year, J.P. Morgan took just $5 billion in losses on high-risk CDOs and leveraged loans, compared with $33 billion at Citi, $26 billion at Merrill Lynch, and $9 billion at Bank of America (BAC, Fortune 500). And in this market, losing less means winning big. Before the crisis J.P. Morgan was a middle-of-the-pack performer; today it leads in nearly every category, starting with its stock. Since early 2007, its share price has dropped 24%, to $37 (as of Aug. 27), vs. declines of 44% for Bank of America and 68% for Citigroup. Last year its market cap was far below those of Citi and BofA. Today J.P. Morgan stands in a virtual tie with BofA for first place among U.S. banks, and it towers over Citi.

Source: http://money.cnn.com/2008/08/29/news/companies/tully_jpmorgan.fortune/index.htm?postversion=2008090216

As for now, the acquisitions/takeovers/bailouts are as follows:
Bank of America - Merrill Lynch at 50 billion
Barclays - Lehman brother's US banking units
JP Morgan - Bear Stearns, Washington Mutual (latest)
Fed - AIG, Fanny and Freddy

While other news include the last 2 investment banks, Goldman and Morgan Stanley to be converted to commercial banks for them to raise capital easily.

Injection of capitial from investors:
Goldman - Warren buffet (5 billion)
Morgan Stanley - Mitsubishi (8 billion), rumoured to have GIC and some other china institutions interested in it.

Bloody Monday

Looking at yesterday's trading in US, it was really sad to see that Lehman brothers has filed for bankrupcy and their workforce is close to 28,000 employees.

The news that caught me by surprise was the Bank of America and Merrill deal. Lehman has been on the news for the past few days and it was more or less expected in the worst case scenario that it will go bankrupt and close down due to the various rejections of buyers. However, Merrill, with a much more robust business model in its organization, took a surprise deal for 50 billion to be acqusitied by BOfA. Apparently, the losses that were stocking up in Merrill could be 1 of the reasons the deal had to be done quickly, possibly the lehman incident is another factor that Merrill's CEO, John Thain took into consideration as well.

Out of the 5 financial investment firms, 3 has been considered 'wiped' off. Will Goldman Sachs and Morgan Stanley suffer the same fate as well?

Next news that caught probably everyone by surprise was AIG. This was an insurance organization, which had incurred tremedous losses due to the subprime and it is now trying to raise capital in order to survive. AIG is one of America's largest insurer and probably more than 1/2 of US citizens own their policies. Anyway, on CNN Money, it was indicated that 20 billion will be injected to AIG from the N.Y state governor to save this insurer from suffering the same fate as Lehman brothers. How will this impact AIG in the long run?

I'm sure everyone is disgrunted on how exposed an insurance company was to the subprime. Would you put your life policy on such an organization in the future? There's going to be alot of PR and restructuring of the whole of AIG in order to restore consumer's confidence and put this incident behind.

Last but not least, WaMu a.k.a Washington Mutual, another large savings and loan company in the US, is also suffering the same fate as what Lehman brothers went through the past few weeks. Will they be able to raise capital to prevent the same fate?

Some news for reading.

From warren:

OMAHA, Neb. — Billionaire investor Warren Buffett said Friday the economy continues to be in a recession, by his definition, and will continue to be for at least several more months.
During a live appearance on CNBC, Buffett said ripples of the credit crunch are continuing to cause problems in financial businesses and the economy.

Earlier this year he said a financial crisis reveals which players have been "swimming naked," because the tide goes out. That picture has worsened along with the crisis.

"We found out that Wall Street has been kind of a nudist beach," said Buffett, who is chairman and chief executive of Berkshire Hathaway Inc., which is based in Omaha.

Buffett said activity at businesses Berkshire owns, especially ones related to housing construction such as Shaw carpet and Acme Brick, continued to slow during the summer.

He's confident the nation will be doing better five years from now, Buffett said, but the economy could be worse five months from now. Buffett said the economy is in a recession because most Americans aren't doing as well today as before. The technical definition of a recession most economists use is two consecutive quarters of negative growth in the nation's gross domestic product.

Regarding the nation's credit crunch, Buffett said he believes mortgage giants Fannie Mae and Freddie Mac are too big to fail, but that doesn't mean that all the shareholder equity in those companies can't be wiped out.

"They're looking for help, obviously. And the scale of help is such that I don't think it can come from the private sector," Buffett said.

So the Oracle of Omaha predicted that the federal government eventually will have to step in to help because the troubles of Fannie Mae and Freddie Mac seem to be growing and feeding on themselves. Together the companies hold about half of U.S. mortgage debt and are the largest source of funding for home mortgages. But they are seeing too many defaults. Losses between April and June for the two companies totaled $3.1 billion, and investors fear they will continue to grow. Buffett said it's likely more banks will fail, especially in areas where there was a real estate bubble and the bank got heavily involved in the housing market.

"What we'll see is failures where the bankers were dumb in what they did," Buffett said.
But Buffett said the Federal Deposit Insurance Corp.'s guarantee on accounts up to $100,000 should prevent bank failures driven by panic. Buffett said the nation's current economic struggles create investment opportunities, and his phone is ringing more lately than it was three months ago. But Buffett said many of those calls have come from desperate people and didn't represent good investment opportunities.

As the stock market problems continue, Buffett is looking for ways to use Berkshire's roughly $31 billion in cash. "The cheaper they get, the harder I'll look," he said, referring to shares.
He said Berkshire added to some of its holdings because share prices fell enough to be attractive. The company had been buying shares of either Wells Fargo & Co. or American Express Co. in recent months, he said, but wouldn't specify which.

On Friday, American Express shares gained $1.78, or 4.8 percent, to close at $38.79, while Wells Fargo gained 92 cents, or 3.2 percent, to $29.36. Buffett also said Friday he sold nearly two-thirds of Berkshire's 35.6 million shares of Anheuser-Busch Cos. stock because he hadn't been sure Belgian brewer InBev SA's takeover bid of $65 a share would succeed. Anheuser agreed to the $52 billion bid in July.

"In retrospect, I was wrong to partially sell the holdings," Buffett said, disclosing that he sold the stock for about $61 or $62 a share. At the end of June Berkshire still held 13.8 million shares of Anheuser.

Buffett said the trip he and friend Bill Gates took earlier this week to Canada to look at Alberta's oil sands shouldn't be interpreted as a sign that he or Berkshire will invest in mining companies.
Buffett said what he learned on the trip may be useful a couple years down the road, but he has no current plans to invest in oil sands mining.

On the political front, Buffett encouraged Americans not to expect perfection from candidates. He said the presidential race features two good candidates this year, but he favors Democrat Barack Obama even though he doesn't agree with all of his proposals.

"The only way to get somebody who agrees with you 100 percent is to run yourself, and I have no interest in that," Buffett said.

Berkshire subsidiaries include insurance, clothing, furniture, candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co. and Wells Fargo & Co.

Link: http://www.huffingtonpost.com/2008/08/22/buffett-recession-will-co_n_120754.html

23rd August 2008

With oil whipsawing the markets these few days, those speculating in oil will probably feel the heat. Nothing much to mentioned about these few days but the same old stuffs, looking at oil prices, inflation starting to be contained, but the main targets are still the financial institutions, where everyone is still looking forward to the fourth quarter results. Lehman brothers was the hot topic these few days, where goldman analysts targeted them, as well as citigroup and some others.

This is a nice chart to show how much they have declined since the credit crisis.

That's pretty much what I know for these few days, and in the meanwhile, I got to make some decisions on my career.

Psychological contract

Off topic:

Here is one of my reports I did on employment relations.


A psychological contract is defined as the mutual expectations held by employees and their employers regarding the terms and conditions of the exchange relationship (Kotter 1973). A psychological contract between two parties in an employment setting creates an enduring mental model of the employment relationship, which provides a stable understanding of what to expect from each other and guides efficient actions by both parties. As such, the subjectivity of the contract means that an individual can have a unique experience regarding the exchange relationship with an employer (Rousseau 2004). Feldhiem (1999) describes that the psychological contract can be divided into two areas, which is transactional and relational. The transactional factor is based on economic or monetary terms with clear expectations that the organization will fairly compensate according to performance while the relational factor is a socio-emotional base that underlies expectations of shared ideals and values, and respect and support in interpersonal relationships.

Overview of employment
The popular view of the ‘traditional’ promise of job security in return of hard work or organizational career in return for loyalty and hard work has been eroded by organizational changes, such as downsizing or retrenchment (Guest, 1998). Since the 1980s, the increasingly competitive environment and rapid technological developments have caused many organizational restructuring, resulting in changes in employment relationships among employees at all levels (Shore 2004). One example would be Singapore’s largest port operator, PSA Corporation, where the organization held a retrenchment in February 2003. This signifies that no employees are indispensable to the organization. Bridges (1995) discussed about this point where organizations can no longer offer employees careers for life. As such, employees may not feel safe and stay loyal to the organization and this may result in job hopping every few years.

Employment relationship
By entering into an employment relationship, the employee is accepting an obligation to supply particular services to the organization as well as following the directives of management. The employee also perceives that the organization is obligated to provide certain items in exchange for the contributions supplied by the employee, such as wages, benefits, training, and career opportunities. Likewise, the employer accepts and expects certain obligations when entering into a relationship with a new employee (Barnard 1938). As such, employees may have the perception that proper training and resources will be provided. Sturges (2000) agrees on this point, stating that many employees continue to anticipate receiving some kind of career management help from their employers. These perceptions of mutual obligations are created by spoken and written communication, as well as by actions taken by each party. Both parties may believe that the obligations are mutually understood but the communication is often incomplete or inaccurate. This miscommunication is not intentional or malicious but caused by a natural tendency by both parties to present a favorable image during the attraction process. This leads to both parties believing that more promises are made than might be intended. Since each party will only provide what they believe they owe to the other, if one party believes the other is obligated to provide a particular contribution yet the obligated party is unaware of that obligation that party will invariably fall short of delivering it (Shore 2004). An example would be an IT executive where the employer should provide the employee with all the necessary training and resources to perform the duties. If inadequate training or resources are provided, the employee may struggle to keep up with the daily tasks. Apart from this, the behavior of the employer, supervisors and managers on a day to day basis is not determined by the written contract. According to Guest (1998), employees will need to negotiate on the roles and duties to perform in order to satisfy their side of the bargain and what to expect in return.

Breach of the psychological contract
A violation of the psychological contract occurs when an employee experiences a discrepancy between the actual fulfillment of obligations by the organization, and the promises previously made about these obligations. The degree of the violation depends on the type of violation, the degree of discrepancy, and whether the organization is held responsible for the violation (McFarlane Shore and Tetrick 1994). As psychological contracts are formed on the basis of trust, the violation may lead to strong emotional reactions and feelings of betrayal. This may lead to various results like higher turnover, lower trust and job satisfaction and lower commitment to the organization (Rousseau 2004). Robinson (1995) and Herriot (1996) agreed that psychological contracts become more transactional compared to relational after a violation. This will result in the employee focusing more to financial and economic aspects.

Moreover, Studies from Bunderson (2001), Coyle-Shapiro & Kessler (2000), Kickul (2001), Lester et al. (2002), Raja et al. (2004), and Robinson (1995) have provided convincing evidence that the perceived discrepancy that was promised by the employer was negatively related to an employee’s organizational commitment, in-role performance, and extra-role behavior or organization citizenship behavior. These results are consistent with both social exchange theory (Blau, 1964) and equity theory (Adams, 1965). According to these theories, employees are motivated to seek fair and balanced exchanges with their employer. Employees whose psychological contracts have been breached are likely to believe that their employer cannot be trusted to fulfill its obligations and does not care about the well being of its employees (Robinson, 1995). When this happens, the employee will be less loyal to the organization and a drop in performance may be expected.

Importance of the psychological contract
Research from Rousseau (2004) has consistently show that unmet obligations generate far more intense and negative reactions than unmet expectations. Expectations based upon the creation of the psychological contract differ from other expectations because they generate different consequences for the individual. This demonstrates the importance of psychological contracts in understanding employee responses and highlights the critical role that reliance losses play in reaction to organizational changes. It is important to identify how the psychological contract can affect employees in defining the relationship with their employer. If it is used correctly, it can reduce insecurity, shapes the behavior of the employee and gives the employee a feel of being influential in the organization (McFarlane Shore and Tetrick, 1994). Especially in the context of Singapore, it is important for employers to retain talents, as the main resource is human resource.

Luc et al. (2004) discussed on employees accepting the authority of hierarchy and adopting a traditional attitude and respecting orders. It was identified that job titles and job designations are extremely important in Singapore as it signifies employees’ career milestones and achievements. In other words, Singaporean employees are sensitive over their job titles and designations and they preferred job titles and designations that feel more important. An example is like an IT technician compared to an IT systems engineer. Employees would have the perception that the role of an IT systems engineer holds higher role and responsibilities as compared to an IT technician.

Neil (1998) discussed on the re-evaluation of the employee’s perspective, on what they owe to the organization as compared to what it owes to them. In Hofstede (1980) and Kluckhohn’s (1961) research, employees may not react to inducement breach in the same way if they hold different cultural values and these values may have impacts on their work behaviors. Schwartz (1992) described about the traditional cultural orientation as commitment to respect for and acceptance of the customs and norms of a society. In the research studies from Chen et al. (2007), it showed that more traditional employees were less sensitive to their employer’s psychological contract breach as compared to less traditional employees. This is consistent with the findings from Farh et al. (1997), which suggest the importance of the cultural value to organizational behavior in which tradition and modernity may co-exist.

Apart from the traditional variable, research studies conducted by Porter et al. (1998) have identified three important variables that employees perceived. The three variables are job satisfaction, job security and meaningful work. Results show that job satisfaction is an important control variable as employees who perceived that they are receiving less of the inducements than what the organization is offering are less satisfied with their jobs. In Turnley and Feldman’s (2000) study, a similar result was also obtained with regards to job satisfaction. When job satisfaction has been controlled, the negative relationship in job security and meaningful work relating between satisfaction with the organization and gaps in perceptions become insignificant (Porter et. al. 1998). Through Porter’s (1998) research, it shows that knowing the gap between what employees perceive to be the inducements offered to them and what the employers perceived to offer contributes in understanding employees’ satisfaction with the organization. The biggest negative gap in Porter’s (1998) research is the amount of recognition provided by the employers. This was the most significant result after controlling for job satisfaction. It is indicated in various studies that majority of the employees report that their organization provides less recognition than expected and it led to anger and betrayal (Herriot et. al. (1997), Robinson (1995), Robinson and Rousseau (1994)).

From the various research studies conducted, it can be seen that employees are very particular on job satisfaction and the different cultural backgrounds of employees affect their perception towards the organization. As identified in the research by Luc et al. (2004), Singapore employees generally adopts a traditional work attitude and in conjunction with Chen’s (2007) findings, it can be deduced that Singapore employees are less affected by psychological contract breaches.



References

Neil Anderson and Rene Schalk, 1998, The psychological contract in retrospect and prospect, Journal of Organizational Behavior, 19, 637-647

Luc Sels, Maddy Janssens and Inge Van Den Brande, 2004, Assessing the nature of psychological contract, a validation of six dimensions, Journal of Organizational Behavior, 25, 461-488

Adams, J. S. (1965). Inequity in social exchange. In L. Berkowitz (Ed.), Advances in experimental social psychology (Vol. 2, pp. 267–300). New York: Academic Press.

Blau, P. M. (1964). Exchange and power in social life. New York: Wiley.

Barnard, C. I. (1938). The function of the executive. Cambridge, MA: Harvard University Press.

Bunderson, J. S. (2001). How work ideologies shape the psychological contract of professional employees: Doctors’ responses to perceived breach. Journal of Organizational Behavior, 22, 717–741.

Coyle-Shapiro, J., & Kessler, I. (2000). Consequences of the psychological contract for the employment relationship: A large scale survey. Journal of Management Studies, 37, 903–930.

Kickul, J. (2001). Promises made, promises broken: An exploration of employee attraction and retention in small business. Journal of Small Business Management, 39, 320–335.

Lester, S. W., Turnley, W. H., Bloodgood, J. M., & Bolino, M. C. (2002). Not seeing eye to eye: Differences in supervisor and subordinate perception of and attributions for psychological contract breach. Journal of Organizational Behavior, 23, 39–56.

Raja, U., Johns, G., & Ntalianis, F. (2004). The impact of personality on psychological contracts. Academy of Management Journal, 47, 350–367.

Herriot, P. and Pemberton, C. (1996). `Contracting careers', Human Relations, 49, 757-790.

Robinson, S. L. (1995). Violation of psychological contracts: Impact on employee attitudes. In L. E. Tetrick, & J.Barling (Eds.), Changing employment relations: Behavior and Social Perspectives, Washington, DC: American Psychological Association.

Kotter, J. P. (1973). The psychological contract: Managing the joining up process. California Management Review, 15, 91–99.

Guest, D. (1998), Is the psychological contract worth taking seriously?, Journal of Organizational Behavior, 19, 649-664

Rousseau, D. M. (2004). Psychological contracts in the workplace: Understanding the ties that motivate. Academy of Management Executive, 18, 120–127.

McFarlane Shore, L. and Tetrick, L. E. (1994), The psychological contract as an explanatory framework in the employment relationship, In: Cooper, C. L. and Rousseau, D. M., Trends in Organizational Behavior

Bridges, W. (1995), Jobshift, London; Nicholas Brealey

Sturges, J., Guest, D., & Mackenzie Davey, K. (2000), Who’s in charge? Graduates’ attitudes to and experiences of career management and their relationship with organizational commitment, European Journal of Work and Organizational Psychology, 9(3), 351-370

Feldhiem, Mary., 1999 Downsizing, Paper presented at the Southeastern Conference of Public Administration, St. Petersburg, FL, October 6-9.

Shore, L. M., Tetrick, L. E., Taylor, M. S., Coyle Shapiro, J. A.-M., Liden, R. C., McLean Parks, J., et al., 2004, The employee-organization relationship: A timely concept in a period of transition., In J. Martocchio,&G. Ferris (Eds.), Research in personnel and human resources management. Oxford: Elsevier Ltd.

Schwartz, S. J. (1992). Universals in the content and structure of values: Theory and empirical tests in 20 countries. In M. Zanna (Ed.), Advances in experimental social psychology (Vol. 25, pp. 1–65). New York: Academic Press.

Hofstede, G. (1980). Culture’s consequences: International differences in work-related values. Beverly Hills, CA: Sage.

Kluckhohn, F., & Strodtbeck, F. L. (1961), Variations in value orientations. Evanston, IL: Row, Peterson. Kotter, J. P. (1973). The psychological contract: Managing the joining up process. California Management Review, 15, 91–99.

Lyman W. Porter, Jone L. Pearce, Angela M. Tripoli and Kristi M. Lewis, 1998, Differential perceptions of employers’ inducements: implications for psychological contracts, Journal of Organizational Behavior, 19, 769-782

Turnley. W., and Feldman, D. (2000), Re-examining the effects of psychological contract violations: unmet expectations and job dissatisfaction as mediators, Journal of Organizational Behavior, 21, 25-42

Herriot, P. Manning, W.E.G. and Kidd. J (1997), The content of the psychological contract, British Journal of Management, 8(2), 151-162

Robinson, S.L., and Rousseau, D.M. (1994), Violating the psychological contract: not the exception but the norm, Journal of Organizational Behavior, 15, 245-259

Zhen Xiong Chen, Anne S. Tsui and Lifeng Zhong, 2007, Reactions to psychological contract breach: a dual perspective, Journal of Organizational Behavior, revised 16th May 2007

Farh, J.L., Earley, P.C., & Lin, S.C. (1997), Impetus for action: A cultural analysis of justice and organizational citizenship behavior in Chinese society, Administrative Science Quarterly, 42, 421-444
======

I will cover on the economy when I get more news. Yesterday's news was on Citi, where the CEO of Asia Pacific did some restructuring of the operations in AP.

It's been some time...

Since I have posted anything, as I was quite busy with work and my school work. Another semester has passed and I'm embarking into my last 2nd semester. I have started to look for opportunities in the banking industry but with not much responses either... Nevertheless, I won't stop finding :)

Back to the economy, currently the market is more or less stablized with oil failing at a steady rate. With USD/Yen coming back to the range of 110.18-110.19 - 0.07, maybe the green dollar rally isn't far from what we expected. However, I don't really share this sentiment as more banks and mortgage companies are starting to disclose their writedowns. Indymac, Freddy and Fannie, Bear Stearns.. Looking at Citigroup right now, it seem to be a company that investors would want to avoid with all those massive writedowns they are incurring at the moment and probably we won't know whether there's more to come or not.

In any case, I have finished Buffett's book and probably read it for 5-6 times to understand the concepts and ideals he have. The company that I have picked out is SMRT in the Singapore market. I will soon compile the information gathered from the annual reports and determine its financial status and whether it is worthwhile the investment. Why did I pick SMRT?
Firstly, SMRT is the largest train service provider in Singapore as compared to ComfortDelgro. SMRT's service quality may not be that fantastic, but it is the more dominant public transport as there won't be traffic jams on the rails itself, apart from the trains being overpacked. Comparing to other forms of public transport like bus, the service timings are not as comparable as SMRT.
Next, MRT stations are not the same as the past. Looking at the amount of advertisments that are in the MRT stations, MRT trains, it has become an additional revenue for SMRT as well. This in Buffett's idea, is a form of monopoly. Monopoly is important as they control the price of the service provided, and able to rise to beat any rising cost or inflation that the organization faced.
Being backed by the government as well, it shows its competitive advantage.

That's about all at the moment for the background, I will start to do abit of compiling and come out with some research results.

Long day ahead..

Exams are finally over, now I can put some focus in reading up what was missing in between the period. Seems like the market is getting spooked again last night by the feds talking about the 'bad' economy moving forward. Dow was maintaining its support at the 13k mark before plunging back to the 12600+ mark again.
Apart from that, oil has made record again of closing above $USD130. With JPY/USD at 102.87-102.88 - 0.44, it has been trading around this range despite oil prices increasing. I remember reading 1 article or a video recently on oil, probably on money.cnn.com. The person was talking about oil prices, and why it went up and probably will move uptrend till a point where alternate energy has to be in place to replace the fast declining oil supply.
This was also re-enforced by Warren Buffett, where there was a question posted to him on oil prices. He mentioned that people tend to view oil prices on current day as compared to years ago, probably 5-10 years period. Probably 10 years ago, oil prices are factored at $30 (I'm posting a theoratical example), and supply was 100 compared to demand at 90. Taking note of the supply demand curve, you can't possibly sell at a higher price when supply meets demand or supply is more than demand. However, within our 10 year cycle, due to technological advancements, more sophisticated machineries etc etc, it is notable that consumption of oil will increase to support more production. Just like personal computers, it just gets more and more powerful, and in order to support that, you need more power a.k.a electricity to use it. In the oil case, probably as of now, demand is probably 200 and supply is at 90, and this overdemand will be interpreted as a under-supplied market and this only allows oil to increase in price eventually. Oil, eventually as a natural resource doesn't come that easily and it requires many years to be even made (complicated science that I think you can google it out (: ). Of course it is not as simple as this is, but this is a rough overview of how things move.

Oil, as compared to commodities like rice etc are almost the same though in my opinion. As technology advances, for example, better soil/fertilizers/machinery/cropping skills, with the same amount of land, farmers should be able to harvest more at a short time frame as compared to the past. However, take note of the increasing population globally as compared to the supply of such commodities. I don't have any information on the mean average annually on the rise in population, so I am just making some theoratical assumptions. Looking at history, baby boomers was the super rise in population right after World War II. That was the spark in the economy globally. If the supply from last time was 50 and demand was 50, commodity prices should be quite fixed and I believed the goverment policies protect commodity prices from soaring too high as well. This is indicated in the CPI, which sums up those basic necessities and provides an indicative value (CPI stands for consumer price index and it is used to indicate inflation). However, this is only indicative as I stated. The reason is because inflation hits us harder than we expect and this CPI is under-estimating inflation. To simply this rationale, the CPI probably takes the price of bread, rice, toothpaste etc, basically whatever we NEED to use for our most basic life. I forgot the actual formula for calculating but basically it sums up the value and derives a value from this. Taking into account for a normal hike in rice, this CPI will rise accordingly to the rise in rice. BUT, it doesn't take into consideration, that food sellers/distributors/wholesalers etc increase their price too. It's simple logic actually, MOST of the sellers(food sellers) will jump on the bandwagon to raise prices once they heard or suffer this price hike to minimise their cost. Basically if rice producers sell $1 more per sack to the buyers, do you think food sellers like those chicken rice stalls will remain the same price? In general, to retain their profits, they will raise their price to sell at $3.30 instead of $3 for example. I don't know how many plates of rice can be sold for 1 sack, More of the time is due to the media that is showing all these negativity. I hope this example clears up the air :) .

Currently, I am reading "the new Buffettology" and I do recommend this book to investors who wants to know more investing long term. I gain alot of insights from this book and it teaches alot of technical skills in terms of modelling a 10 year prediction of a company's EPS and earnings on average with a estimated deviation based on past results. The first thing to learn from this book on investing is to indentify durable competitive advantage. More to come when I complete the book.

5th May 2008

The start of the new week, nothing much or big happened over the weekend. Some information to share from Warren Buffett's speech:

We are happy to invest in businesses that earn their money in euros in France or Italy or sterling in the UK, because I don't have a feeling that those currencies are likely to depreciate against the dollar," said Buffett. "Overall I think that the U.S. continues to follow policies that will make the dollar weaken against other major currencies.... I feel no need to hedge purchases of companies that earn profits in other currencies." Buffett added that major U.S. multinationals, like Coca-Cola (KO, Fortune 500), are a natural hedge against the dollar, since they earn most of their profits offshore -- which, he said, "will be a net plus over time."

Asked what's in store for the economy, Buffett said he doesn't have a clue and doesn't care.
"I haven't the faintest idea," he said. "We never talk about it, it never comes up in our board meetings or other discussions. We're not in that business [of economic forecasting], we don't know how to be in that business. If we knew where the economy was going, we'd do nothing but play the S&P futures market."

His simple point: As an investor, you don't need to predict the economic cycle (or even pay much attention to it). Instead, you should focus on evaluating individual businesses if you pick your own stocks -- or, simply buy the entire market in the form of an index fund. When a shareholder asked for the single best specific investment idea Buffett could recommend to an individual in his 30s, Buffett said: "I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform...and I could just go back and get on with my work."

Source: http://money.cnn.com/2008/05/03/news/companies/buffett.am.wrap/index.htm?postversion=2008050316

This is very insightful, for people to determine whether they want to be traders or investors. For traders, it is important to know and predict the economic cycle, as there are no long term holdings in a trader's playbook. So, which category do you belong to? After my exams on the 12th, I will start to re-assess my portfolio and make certain readjustments to my investments plans and strategy.

USD/YEN currently at 105.35-105.37 + 0.63, which is showing a very slow uptrend.

I was talking about the US market on how it works last week. Basically, Americans tend to spend on credit unlike us, Asians where we prefer to spend by cash first and save up money. Currently as it goes, consumer index wasn't that great for the past 3 months since the start of January, and this impact hurted the consumer markets with reports of dropping sales etc etc. Even stimulus package from the government didn't help in this area. In my view, people didn't want to spend that package because of a few reasons. Either they are stuck in the mortgage crisis, or they are unemployed. In simple terms, if the economic cycle for US is based on this credit buying, at the current situation where the buying force drops to a certain level, it is not possible to change people's mindset to start spending again when their pockets actually shrink. This is human pyschology in play with accordance to the markets. In this case, how can we say that the worst is actually over? This is a very simplified model, as there are many more factors that affect this as well.
Well, probably the subprime impact is almost over, noone is sure for sure, but the deflation of the USD is still there. Especially after the last rate cut, the impact on the dollar is not surfaced yet. With oil prices running all over the place, there's still quite a big room to clear up the oily mess first before everything settles down.

That's pretty much all for now. Time to go back for my revisions!

4th May 2008

Sorry for the late postings, as I'm currently having my exams for my degree. The news lately is regarding employment figures and fed cuts during this week. Currently, USD/YEN is trading at 105.34-105.37 + 0.62, which is showing a slow recovery for the USD after the fed cut. However, do take note that oil has taken a leap forward to $116.32 (+3.27%) too.
Another view from Warren Buffett:
http://money.cnn.com/2008/05/03/news/companies/buffett/index.htm?postversion=2008050311

Another link to take note of the key rates:
http://www.bloomberg.com/markets/rates/index.html

It's pretty obvious that the LIBOR rates have been falling since the rate cuts started. What is the LIBOR rates?

From this website: http://www.wisegeek.com/what-is-libor.htm

LIBOR, the London Interbank Offered Rate, is the most active interest rate market in the world. It is determined by rates that banks participating in the London money market offer each other for short-term deposits. LIBOR is used in determining the price of many other financial derivatives, including interest rate futures, swaps and Eurodollars. Due to London's importance as a global financial center, LIBOR applies not only to the Pound Sterling, but also to major currencies such as the US Dollar, Swiss Franc, Japanese Yen and Canadian Dollar.
LIBOR is determined every morning at 11:00am London time. A department of the British Bankers Association averages the inter-bank interest rates being offered by its membership. LIBOR is calculated for periods as short as overnight and as long as one year. While the rates banks offer each other vary continuously throughout the day, LIBOR is fixed for the 24 hour period. Generally, the difference between the instantaneous rate and LIBOR is very small, especially for short durations.

The most important financial derivatives related to LIBOR are Eurodollar futures. Traded at the Chicago Mercantile Exchange (CME), Eurodollars are US dollars deposited at banks outside the United States, primarily in Europe. By holding the deposits outside the country, US depositors are not subject to Federal Reserve margin requirements, allowing higher leverage of the funds. The interest rate paid on Eurodollars is largely determined by LIBOR, and Eurodollar futures provide a way of betting on or hedging against future interest rate changes.
Interest rate swaps are another significant financial derivative dependent on LIBOR.

In an interest rate swap, two parties exchange sets of interest payments on a given amount of capital. Generally, one party will have a fixed interest payment, while the other will have a variable rate. The variable rate payment stream is often defined in terms of LIBOR. Interest rate swaps, and by extension LIBOR, are extremely important in providing a liquid secondary market for residential mortgages, which in turn allows lower interest rates on US mortgages.
While LIBOR does have implications for transactions conducted in Euros, the advent of the Euro has brought with it the creation of the Euribor. Conceptually similar to the LIBOR, the Euribor benchmark is defined and maintained by the European Banking Federation.

As far as it goes on STI, it has been trading within a frame of 3000 - 3200, which it breaked out a few times. Currently at 3236, it may probably fall back slightly on monday due to the gap on Thursday.

As I have mentioned last year, the inflation and deflation of the USD will be the killer of the financial economy. Basically, to fight inflation, people invest in commodities. Once this happens, most of the commodities like common food or staple products will rise rapidly. The prices of commodities can be viewed here:

http://www.bloomberg.com/markets/commodities/cfutures.html

Now look at what is subprime? I mentioned this during November last year (http://dimitric-trading.blogspot.com/2007/11/chart-for-celestial.html) which indicted this and now the whole world is trying to find inflation. Look at rice, even at my local hawker center, it used to be 30cents per bowl, and now it becomes 50cents! This time lag triggered alot of reactions from various governments by controlling the distribution, price, and alternative sources. But then, seriously, if you are used to eating rice, are you able to get a alternative product to replace it? Especially for Asian countries, it may not be that easy to convince the people to adopt.

This is very interesting, with the whole world trying its best to fight inflation, my take is this inflation may be over faster than expected but the ultimate damage is already done. Why do I say that? Well, if a chicken rice stall has increased its price from $2.50 to $3, do you think they will reduce its price if rice supply regains normal? It is just like the 7% GST that occured last year and many people took the opportunity to raise prices which is much more than the additional 2%.

I will be reading up on past history, for those inflation periods and the methods they used to break out of this cycle, and identify the next industry or business which will emerge from here. I'm not sure whether there was a consistant pattern from the past, but history typically repeats itself, as the market is mainly dominated by human emotions eventually.

I will talk about the economy of US soon and attempt to break down its cycle on how the financials worked in the world's largest consumer market.