What's Next ? After Crisis and Election

Blink Blink $$$$ Dollar is falling .... What should we do now ?

There are a lot of question on the market now; people talking about Recession 2.0 that will be worse than 1939. Government need to bail out Uncle Sam ASAP before it's collapse. Ben S. Bernanke, Chairman of the Federal Open Market Committee, and Treasury Secretary Henry M. Paulson Jr. will dump another three hundred-billion dollar rescue package once more after 1st attempt and TARP fund are not enough to stable the crazy market; let's see if it work.

However, if you never invest in stock market before; this is the time. Stocks now are very cheap and attractive. A bunch of good companies with strong management team and excellent products & services are sold at deep discount like never before such as MHP (Publishing), AEO (Apparel Retailing) or ADBE (Software Maker).

You should be able to make a 25% return at least if you pick strong companies and hold it for a year or two. Believe us !!! It's not that's difficult to do better than the market. You just need to split 20% of your time a day to research and study the market.

Like our blog motto said "InvestMadeEasy"

Sitting Out The Boom

Here's some funny comic about stock market boom; The Retro Kook, The Dot-Com Rationalist, The Psychotic Optimist and the rest.

Click A Picture To Enlarge

Visual Guide to Financial Crisis

!!!! Click to Enlarge WOW !!!!

The Conclusion of The Crisis

By September 7, 2008 – The Treasury committed to invest as much as $200 billion in preferred stock and extend credit through 2009 to keep the GSEs solvent and operating. The combined of two giant Government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac losses of $14.9 billion and market concerns about their ability to raise capital and debt threatened to disrupt the U.S. housing financial market. The two GSEs have outstanding more than $5 trillion in mortgage-backed securities and debt; the debt alone is $1.6 trillion. The conservatorship action has been described as "one of the most sweeping government interventions in private financial markets in decades".

S&P 500 Index from 2000-2008

LIBOR Time Frame

By September 15, 2008 – the 158 year-old Lehman Brothers holding company filed for bankruptcy with intent to liquidate its assets, leaving its financially sound subsidiaries operational and outside of the bankruptcy filing after the Federal Reserve Bank declined to participate in creating a financial support facility for Lehman Brothers. At the same day; The 94 year-old Merrill Lynch accepted a purchase offer by Bank of America for approximately US$ 50 billion, a big drop from a year-earlier market valuation of about US$ 100 billion. A credit rating downgrade of the large insurer American International Group (AIG) led to a September 16, 2008 rescue agreement with the Federal Reserve Bank for $85 billion dollar secured loan facility, in exchange for a warrant for 79.9% of the equity of AIG.

Why Fed help AIG not Lehman Brothers? Because AIG is in much scarier situation than Lehman; AIG has asset of $1 trillion, more than 70 million customers and intimate back-and-forth dealing with many of the world’s biggest and most important financial firms – Fed have no choice but to intervene.

On September 16 – the Reserve Primary Fund, a large money market mutual fund, lowered its share price below $1 because of exposure to Lehman debt securities. This resulted in demands from investors to return their funds as the financial crisis mounted. By the morning of September 18, money market sell orders from institutional investors totaled of $0.5 trillion, out of a total market capitalization of $4 trillion, but a $105 billion liquidity injection from the Federal Reserve averted an immediate collapse.

On September 19 – the U.S. Treasury offered temporary insurance (similar to FDIC insurance of bank accounts) to money market funds. Toward the end of the week, short selling of financial stocks was suspended by the Financial Services Authority in the United Kingdom and by the Securities and Exchange Commission in the United States. Similar measures were taken by authorities in other countries. Some restoration of market confidence occurred with the publicity surrounding efforts of the Treasury and the Securities Exchange Commission.

Emergency Economic Stabilization Act of 2008 – At the same day, Consultations between the Secretary of the Treasury, the Chairman of the Federal Reserve, and the Chairman of the U.S. Securities and Exchange Commission, Congressional leaders and the President of the United States moved forward plans to advance a comprehensive solution to the problems created by illiquid mortgage-backed securities. At the close of the week the Secretary of the Treasury and President Bush announced a proposal for the federal government to buy up to $700 billion of illiquid mortgage backed securities with the intent to increase the liquidity of the secondary mortgage markets and reduce potential losses encountered by financial institutions owning the securities. The draft proposal of the plan was received favorably by investors in the stock market.

On September 21 – Although Goldman Sachs and Morgan Stanley are only two giant U.S. investment banks not to collapse like Lehman, Bear Stearns or Merrill Lynch, their stock also down by 70%. The two remaining investment banks, Goldman Sachs and Morgan Stanley, with the approval of the Federal Reserve, converted to bank holding companies, a status subject to more regulation, but with readier access to capital. On Thursday evening Washington Mutual, the nation's largest savings and loan, was seized by the Federal Deposit Insurance Corporation (FDIC) and most of its assets transferred to JPMorgan Chase. Wachovia, one of the 4th largest US banks, was to be acquired by Citigroup and Wells Fargo.

Stock Market Crash in 1929 - The Black Monday

Panic, Chaos and Depression - As the history parallels, the real cause of the U.S. depression (after stock market crashed in 1929) wasn’t the stock-market crash but a contraction of credit due to an epidemic of bank failures. The bail-out will eventually pass but the world may still be heading for a severe downturn since emerging market like Brazil, Russia, India and China seem relatively close to U.S. economy. The death cycle also spread through Japan, Europe and Asian regions. The U.S. government is doing what it can to avoid 2nd depression. Although Bailout may be just a short-term fix, a short-term fix is better than no fix.

The Bail-out – the Fed step in and roll out bailout plan; however some credit market already seized up, including auction-rate securities. On September 29, the first attempt in congress vote for bailout plan failed after the vote being held in the House of Representatives, 205 for the plan, 228 against. Meanwhile US stock markets suffered steep declines 7 straight days. Death spiral last until October 13, 2008 before the Fed successfully pass $700 billion bailout plan. The United States Senate's version of the $700 billion bailout plan modified to expand bank deposit guarantees to $250,000 and to include $100 billion in tax breaks for businesses and alternative energy.

Doldrums Rhythm – How long could this recession last? In the past, whenever markets have faltered, American shoppers have come to rescue, spreading around prodigious amount of cash so that businesses can grow and hire again. Consumer spending accounts for 3/4 of the $14 trillion U.S. economy. But not this time, since their homes are still falling in value; stock market volatility has set everyone on edge; no cash-out refinancing; credit from other sources will soon dry up and personal debt 100% of annual GDP.

A recent study and survey about recession around the globe, the IMF says that the combination of housing bust, stock market bust and credit contraction could extend economic recession up to 3 years, compared with less than 1 year for typical recession. Some economists predicted that U.S. economy will have short recovery after recession. From Wall Street to Main Street, expect 12 – 18 months prolong period for all the pain will come to Main street (Our daily life) – banks will cut back on their lending to household and businesses; mortgages and car loans will become harder to get; that’s turn to stifle consumer spending and crimp investment in companies, leading to production cut and job losses. In its latest economy outlook, published on October 8, 2008; the IMF predicted that the U.S. economy will grow just 0.1% next year.

Mr. Bull or Mother Bear

What’s Next – Sooner or later, the hundreds of billions or trillions of dollars that Fed and other central banks are throwing into the markets will stabilize things. Housing prices will stop falling because no financial trend continues forever. We can’t tell when but we better to stay in market as it still in accumulation phase so we won’t miss next bull market as economic start to recover again. As old say that “no one can’t time market”; It’s a smart way to stay in market as it still have a lot of opportunity to buy first-rate companies when they dip on negative news such as an earnings miss. Some very solid industrial companies are paying decent dividends and still look cheap. Smart investors always make money when others panic.

2008 : A Year of Destruction

Financial Meltdown 2008 Rescue Please ....

What Happened in Collapse of 2008-2009 ?

The Housing Bubble Bursts – U.S. Bank like Countrywide and Washington Mutual continue to give housing loan to low-income household (sub-prime family) from 2000 – 2007 because housing market boom. Housing values fall as supply overwhelms demand. Many sub-prime borrowers find their house worth less than their mortgages, and they can’t afford to pay monthly payment as its interest adjustable. Defaults rate rise because borrowers don’t pay and foreclosure come in, which sends housing prices lower. The downward spiral begins.

CDOs Festival – Investors particularly foreign investors seeking higher yields (return on investment), then the new innovation kicked in. Government backed-up private organizations like Freddie Mac and Fannie May buys mortgages on the secondary market, combined them, and sells them as mortgage-backed securities to Investment Bank; then Investment Bank sell to investors on the stock market. Banks and investors all over the world bought these CDOs because it’s rated AAA so they assumed it must be safe.

Leverage Loves Greed Company – Investment Bank or Financial firms like Lehman Brothers, Merrill Lynch and Bear Stearns leverage their money 30 times to load up on CDOs as much as they could to sell to investors so they can make a gigantic profit out of nothing. This mean they bought $300 billion CDOs by using ONLY $10 billion money.

AIG vs. CDS – How come insurance company involve in this turmoil? Answer is Credit-Default Swap (CDS). Yes!! AIG sells Credit-Default Swap for those CDOs to the most of Banks and financial firms in order to insure their money in case of CDOs default.

The Mortgage Collapse – Borrowers whose is low-income family begin to late on payment, and then default on loans rise to maximum 9% this year. Lender like Countrywide and Washington Mutual take a hit first and finally collapse.

Finance institutions is Next Victim – Rising delinquencies in home loan mean that CDOs lose value. Nobody wants to buy CDOs anymore and everyone wants to liquidate it. The investment banks must take write-downs (bad debt on balance sheet). To compensate, they must raise new capital (money), probably by selling their bond or accepting external fund, to maintain balance ratio between their asset and capital. However, they have no way out to raise enough capital because they already leverage too much.

CDS Ripple Hit AIG – Many CDS were sold as insurance to cover those exotic financial instruments (CDO) that created and spread the subprime housing crisis, details of which are covered here:

As those mortgage-backed securities and collateralized debt obligations became nearly worthless, suddenly that default was happening daily. The banks and hedge funds selling CDSs were no longer taking in free cash; they had to pay out insured money. However, most banks were not all that bad off, because they were simultaneously on both sides of the CDS trade. Most banks and hedge funds would buy CDS protection on the one hand and then sell CDS protection to someone else at the same time. When a bond default; the banks might have to pay some money out but they'd also be getting money back in. Everyone, except for AIG do that.

AIG was on one side of these trades only. They sold CDS. They never bought. Once CDO bonds started defaulting, they had to pay out and nobody was paying them. AIG seems to have thought CDS were just an extension of the insurance business. But they're not. When you insure homes or cars or lives, you can expect steady, actuarially predictable trends. If you sell enough and price things right, you know that you'll always have more premiums coming in than payments going out. That's because there is low correlation between insurance trigger events. My death doesn't, generally, hasten your death. My house burning down doesn't increase the likelihood of your house burning down.

Not with CDO. Once some CDO bonds start defaulting, other bonds are more likely to default. The risk increases exponentially. Credit default swaps written by AIG cover more than $440 billion in CDO bonds. AIG has nowhere near enough money to cover all of those. Their customers-those banks and hedge funds buying CDSs – started getting nervous. So did government regulators. They started to wonder if AIG has enough money to pay out all the CDS claims it will likely owe. Just when AIG is in trouble for being on the hook for all those CDS debts, along comes this credit-rating problem that will force it to pay even more money. AIG didn't have more money. The company started selling things it owned-like its aircraft-leasing division.

All of this has pushed AIG's stock price down dramatically. That makes it even harder for AIG to convince companies to give it money to pitch in. So, it's asking the government to help out because the global economy could, possibly, come to a halt. Banks all over the world bought CDS protection from AIG. If AIG is not able to make good on that promise of payment, then every one of those banks has lost that protection. Overnight, the banks have to buy replacement coverage at much higher rates, because the risks now are much worse than they were when AIG sold most of these CDS contracts. In short, banks all over the world are instantly worth less money. The numbers seem to be quite huge-possibly in the hundreds of billions. To cover that instantaneous loss, banks will lend out less money. That means other banks can't borrow to pay this new cost, and weaker banks might not have enough; they'll collapse. That will further shrink the global pool of money.