Derivatives Damage not over yet. --> World's Largest Casino

Excerpt from http://www.nytimes.com/2008/11/22/business/22bank.html

"Then, on Tuesday, a report about imminent defaults on two large commercial mortgages sent the price of bonds backed by those loans tumbling. The first $209 million loan was backed by two Westin hotels in Arizona and Hilton Head, S.C., and the second was a $125 million loan backed a shopping complex in Southern California"

Obviously, we haven't hit bottom yet.

It looks like the damage from the mortage market is still coming in.

Fannie and Freddie postponing foreclosures until January is going to just delay things... then the explosion will hit all at once. BOOM.

I mean come on. Westin and Hilton are defaulting on their mortages for crying out loud. What chance does an unemployed American have? ... none, that's what.

Remember, there's 1.4 quadrillion, aka USD1400 trillion of derivatives out there. A mere 1% write off in this figure is 14 TRILLION.
Some people are saying that a lot of these derivatives offset each other.
Well... you know what that means? It actually means that there is a possible outcome that some people are going to collectively profit 700 trillion, some people will lose 900 trillion, and 500 trillion will just rollover.
That will be rather chaotic, actually.

You know what? A lot of people have been claiming that there's a ton of financial institutions that stand to lose billions if the CDO market is allowed to collapse. Er... can we start naming those who stand to make the corresponding billions?

No?

Maybe there isn't as much "offset" and balance as you guys think!!!


Look, here's the deal. Casino's are regulated. Because everyone, EVERYONE knows that uncontrolled heavy gambling can cause ridiculous damage to many people. (while greatly enriching others). At the end of the day, gambling is a zero sum game. It doesn't actually create value, it just redistributes wealth. (though it does have some economic stimulation benefits that come with it... I'm just talking about gambling itself)

Similiarly, the derivatives market is nothing but a big huge casino. Yes you can say it's necessary for hedging, but you forget that the opposing side of the contract is a gambler then. The derivatives market is the WORLD'S LARGEST CASINO.

Even Buffet, who claimed to be against derivatives, and called them financial WMDs, got into the act. The lure of gambling pulls even sane men in...
http://www.capmag.com/article.asp?ID=2531
http://www.bloggingstocks.com/2008/05/03/what-was-berkshire-hathaway-doing-with-derivatives/
http://thestar.com.my/news/story.asp?file=/2008/11/8/apworld/20081108122407&sec=apworld
http://www.reuters.com/article/ousiv/idUSTRE4AK6XX20081121

"Warren Buffett's Berkshire Hathaway Inc provided details to the U.S. Securities and Exchange Commission on how it values what has so far been a money-losing $37.04 billion derivatives bet, after the regulator asked for better disclosure."
"The company obtained about $4.85 billion of premiums upfront, which Buffett may invest as he wishes.
Buffett has said he expects the contracts to be profitable. But falling equity values had by September 30 forced Berkshire to write down $6.73 billion on the contracts. Losses have almost certainly mounted since then as stocks worldwide tumble."


Summary: People have been frequenting the casino for years, making large bets. Even with the odds in their favour, an eventual huge loss is no big surprise to some.
Also, Buffet has not been the paragon of honesty in the recent past. I think that comes partially from his shift from "I manage other people's money. My greatest virtue is my honesty, integrity and investment acumen" to his current focus on being CEO of many businesses, such as INSURANCE, financial etc etc, where the key to success seems to be "screw the shareholders, screw the customers, screw the company, the honest and prudent man makes lower profits"

Capitulation in US Housing coming: Malaysia will come later.

Here is what people THINK capitulation means: they think it means a large fall in the market, due to sentiment, after which the dust will settle, and everyone will jump in with all the cash they've laid by the sidelines, allowing a huge rebound.

Here's what I think capitulation will mean this time around:

Some people will realise they don't have as much cash lying by the side as they thought, and will be FORCED to sell. Unit Trusts been telling you not to liquidate, the bull will return? Your neighbours insisting that this is just a temporary housing glut?

Well, for some people, they are realising that they need cash, and they need it now, and they CANNOT AFFORD TO BARGAIN. They have to take buyers price, no matter what it might be.

It looks like the first to be hit are looking to be the Elderly.

Excerpt from:

http://www.nytimes.com/2008/11/22/us/22home.html?pagewanted=1&hp&adxnnl=1&adxnnlx=1227355470-Zlmge3SmDxUILDK2CQ8lIQ

Sooner or later, if things don't improve, these people are going to keep lowering their prices until they do find a buyer. They have little choice. It's come to the point where they either sell their home at a loss, or they sell their 401k plan at a loss... basically, they just have to sell their assets and take a loss.

As for our own markets... we are currently nowhere near capitulation. There are far too many people who are saying, "If I sell at this level, I will lose money!"

Get it through your head people. You have ALREADY lost money. Not admitting it is not helping.

Still, it's just human nature to delay the inevitable. Look at GM, AIG, Fannie, Freddie...

Capitulation in our markets will appear when everyone; (and by everyone I mean the 95% of the population who do not have enough in Fixed Deposits for them to live comfortably for the rest of their lives), when everyone realizes that times are getting tough, those properties they own are not getting rented out or resold, and those shares are not giving out dividends, their credit cards have been maxed out, and their company has begun to layoff workers...

My forecast is that the order of events in Malaysia will be this: Layoffs will be announced (first hit). Then layoffs will be implemented. Looking at the distribution of employment, I would say that the worst affected area would be Klang Valley. Effect of layoffs: many people will move back to their home states, selling their homes, or ceasing to pay rent. The housing fall will trigger another fall in shares.
As cheap foreign workers leave Malaysia, businesses will start to founder. Both due to lower revenues, and also because of lack of cheap labor. Some will close, some will have no choice but to sell blue-chip shares in order to keep their companies running.
When High Wage foreign expatriates leave, you can watch those high end properties shed ridiculous amounts of value. Those construction companies are going to be in serious cashflow problems. This of course will flowover to the banks which are doing financing.
At some point, banks will tighten their debt policies. At which point, you will really see a selloff of shares and "excess" investment property as people fight to keep their businesses, their homes, and their daily lifestyle expenses.
How about the return of our own workers who are abroad? I know for a fact that we have a decent number of Malaysians in America... I am uncertain of their policies over there, but I have my suspicions that there will be a bias to give American jobs to American people. Then again they have laws against that sort of thing, so who knows? Anyhow, I would assume that a lot of High Income (by malaysian standards) people overseas will lose their jobs and will probably end up coming back to Malaysia and liquidating some assets.
Sooner or later, we are going to see those "amatuer" shareplayers exit the market... I'm talking about those guys who don't even talk to a remisier, the ones who just get an online trading account, and have no idea what a PE ratio is... what's worse is that this group of people usually have shaky financials in the first place.

According to an advisor of mine in Australia, Australian economy is delayed behind America a couple of months. In other words, if consumer demand drops in America and layoffs occur, you can foresee layoffs in Australia a few months down the road. I have my suspicions, but no confirmation, that the same is true of Malaysia. A country which exports so much, has absolutely no need for so much production capacity during an economic downturn, and even less need during a global recession. ... I strongly suspect that we have at least 30% more labor than necessary for production, at the moment. (but again, I have no numbers. I don't think anyone has these figures, in fact, due to unfathomable hiring policies, foreign workers, inefficiencies, delay factor in hiring/firing...)


Summary: Capitulation. Look up a dictionary. It means total surrender. It does not mean "temporary retreat".
The elderly and unemployed will be the first to capitulate. This is why, after all, this is a world where the rich get richer and the poor get poorer. The rich will be the ones who will lead the rebound, and profit from it. The poor will be the first to cave in to the buyer's market, and will lose out most.