Why I hate Bank Stocks.

Why do I hate bank stocks?



Summary: Neither A borrower nor a lender be.



Banks basically make money thru borrowing and lending. And through buying and selling financial instruments, hur hur hur.



All activities which I'm not really all that fond of.



Banks assume that if you give 100,000 loans, 97% of them will repay their debts.



... which I am rather skeptical of!



Call me a cynic, but I think that if you or me went around giving loans, we would not be surprised to find 2 out of 10 people giving us problems collecting. That's 20% NPL.



And frankly, do you think would be more stringent in lending criteria, us or the banks?



Frankly, these banks are giving loans to any tom dick and harry! And large ones too!



Even my cleaning lady can get a 25k loan, with no collateral!



So, when banks announce that they only have 3% or 5% non-performing loans, I am SKEPTICAL.



...



As for the financial instruments... hahaha, no need for me to speak on that subject, right?

American Twilight?

In a way, this is possibly the most negative article I have read so far... it's not a far flung doomsday article, more like... stating the obvious... IMHO. Still, his conclusions may or may not come true...

Ladies and gentlemen, I present an excerpt from Christopher Grey's article: Opinion: Is It Twilight in America? http://www.thestreet.com/story/10456268/1/opinion-is-it-twilight-in-america.html

"The most fundamental economic problem we face is not a credit crunch, or unemployment, or falling home prices, or a stock market crash. All of those things will naturally correct themselves over time. The most serious economic problem we face is a severe lack of private savings and sustainable income generation to support the expenses of our government and the private standard of living for our citizens.
Even with historically low interest rates, the ratio of our consumer debt payments relative to income is at an all-time high. The Bureau of Economic Analysis reported in December that savings from current income for most Americans may be zero or negative when financial outlays are financed by borrowing.How bad would things get if interest rates were to rise? This will eventually happen since rates can't go below zero.

We have been avoiding the consequences of too much debt, too much spending, too little income and too much speculation for many years due to increasing leverage and appreciating assets such as homes and stocks.

Now that these and other financial assets have been falling for the past year because of deleveraging, we are only beginning to realize how weak and fragile our economy is without constant asset inflation. This is a very scary thought for most people to comprehend, and politicians don't want people to think about it. But the problem is not going away, and it is getting worse every day that we ignore it.

The Fed is basically printing so much money that it is staying ahead of what would naturally be a short-term deflationary period as the economy tries to adjust from years of rampant asset and commodity inflation.
After this downturn runs its course -- probably over the next few quarters -- all of this excess liquidity created by the Fed is going to cause a tremendous surge in inflationary pressure. At that point, the Fed will either need to dramatically raise interest rates to fight inflation or allow a collapse in the purchasing power of the dollar and a stampede out of U.S. assets by foreign investors.

The current government policy of free money combined with encouraging Americans, who largely have no savings and spend more than they earn already, to borrow and spend even more seems too bizarre not to be intentional.

The Fed's real objective here is to promote a combination of fear mongering about deflation to justify keeping interest rates at zero, while at the same time promoting as much inflation as possible in an attempt to orchestrate a massive stealth devaluation of the U.S. dollar and short-changing of all foreign investors in U.S. assets.

It is a con game of epic proportions, and it could work if foreign investors are dumb enough to allow themselves to get pennies on the dollar for their dollar denominated investments. However, if it doesn't work and foreign investors wise up to this game, the U.S. will face an economic Armageddon that will make the past year look mild.

Why would that happen? The U.S. economy needs to import several billion dollars a day from abroad just to keep the light on. If foreigners turn off that spigot of cash, even if they don't dump their existing U.S. assets, our economy will collapse. An even more extreme possibility is that there is an international revolt from the dollar as the world's reserve currency.

If that happens, we could no longer just print as many dollars as we want with minimal consequences. We could ultimately have to default on our debt like Argentina, Russia, or Ecuador. I do not predict that happening because the U.S. is too big for the world to allow it to default, but my point is that we are entering a world that will no longer allow us to make believe that printing dollars is free. There will be a cost to all of this money printing, and that cost is going to increase.

As President-elect Barack Obama tries to channel Franklin Delano Roosevelt with his recent statements, he should remember that this is not 1933. At that time, America was the world's largest creditor nation. We are now the world's largest debtor. Also at that time, Europe and Asia were both in the process of disintegrating as a result of revolutions, fascism, socialism, and ultimately World War II. This situation left America as the strongest country in the world.

If you look at when the stock market actually ended its bear market that began in 1929, it was actually within a month after Pearl Harbor. Of course the market bottomed back in 1933. But if you look at when the new bull market began, it wasn't until January 1942 and coincided directly with the entry of the U.S. into the wars in Europe and Asia. I do not see any similar circumstances globally that will benefit America, nor do I see the benefit of being the world's largest debtor instead of the world's largest creditor.

Obama today faces a much more serious challenge than FDR ever did. Hopefully, his administration will rise to that challenge, and maybe America will somehow get lucky. I don't know. What I do know is that it is not helping for our nation's political and financial leaders to keep writing checks that they can't cash and lying to the American people about the financial solvency of our nation and how we're going to turn things around.

We aren't going to save ourselves economically with more borrowing and spending and speculating. That much should be clear to everyone at this point. History will judge our current leaders very harshly if it turns out that they presided over the twilight and ultimate decline of our great country because they were either too afraid or too ignorant to face up to our real problems and take action to start correcting them."





Summary, and to stress which points are pretty much well-known FACTS:

Too much borrowing, lending, and printing money got us all into this mess. Fact of the matter is, it just went on and on and on... but no one noticed, because the autos, property, and stock market were on the UP cycle. But, as we all know, all these are cyclical.
As soon as the downturn went on for any length of time, the shit hit the fan.

I view the problem as a bunch of doctors who are in fact drug abusers. They're all off in happy happy land every day. One day a few top doctors find that they are all getting unhealthier. So, one of them decides to they have to quit... the other doctors agree this is the right thing to do, so they all vow, no more drugs. (No more bank rescues! Let Lehman go!)

The next day, they are all wracked with withdrawal pangs and collapse on the floor, unable to function!

And then declare that they are going to prescribe drugs to themselves. Some doctors admittedly attempty prescribic alternate drugs. Some doctors swap drugs with each other. In a horrible moment of clarity, some doctors realize that their "normal" amount of drugs is NOT SUFFICIENT, so they need rather ridiculous dosages to keep themselves in happy happy land! (Bailouts and stimulus packages of rather unprecedented size)

At the end of the day, none of them can face the hard decision: sooner or later, they are going to have to face this horror that they have brought upon themselves.

Seriously... living on drugs/debt... and enjoying yourself for a few years... and at the end of it, you expect to somehow manage to avoid any negative consequences???

... I don't think so.

Idiots.

GMAC Bond-Equity sorta flops... but they get the money anyway.

http://www.bloomberg.com/apps/news?pid=20601087&sid=am4IwraGSAW0&refer=home

"Dec. 31 (Bloomberg) -- GMAC LLC, the auto lender that’s getting a $6 billion federal bailout, completed a debt swap designed to bolster its capital after falling short of its $38 billion goal.
About 59 percent of its old notes eligible for the swap and 39 percent of the debt from its Residential Capital unit were tendered, according to a statement from Detroit-based GMAC today. The goal was 75 percent. "

"GMAC and Residential Capital had some of their debt rated SD, or “selective default,” by Standard & Poor’s to reflect results of the swap. The downgrade from CC was made because bondholders that signed up for the exchange received less than their original investment, and the swap “left untendered bonds in a subordinated position to the new notes,” S&P said today in a statement. "

"GMAC, responsible for financing about 35 percent of GM’s retail customers last year, said it will now lend to vehicle buyers with credit scores of 621 or higher, compared with a previous standard of at least 700. The higher threshold had excluded about 42 percent of U.S. consumers. "

"GMAC ran short of cash this year after $7.9 billion of losses over five quarters, mostly from record defaults on subprime mortgages, which are made to homebuyers with the worst records. The lender was shut out of credit markets and had to limit lending only to people with the top repayment histories."

...

Well... now GMAC is an investment bank. Question is, what lunatic would deposit money into GMAC now? ... other than government bodies of course.
Still, if the government just keeps giving it money, that's more than good enough, right?

Heh. Looks like GMAC management were not satisfied with getting defaults from subprime loans... they are aiming to get defaults on their car loans too? ... lowering lending standards... well, of course that was part of the Terms and Conditions of that TARP loan, so, they can't help it... but... geez.

... 42% of US consumers have credit scores below 700? ... ok... I need someone to translate to me what that means exactly.

Anyhow... bottom line is:

Problem: US car industry needs people to buy cars. And pay for them.
Problem: Cars are cyclical. And we're entering a natural downturn, even without the recession.
Problem: How many cars does one family need, really?

Malaysia and Singapore's alternative to unemployment: Some Projected Effects.

Due to falling consumption, firms are cutting production capacity... it's an unnecesary cost. In other words, reducing the amount spent on labour. For UK and US, this means layoffs.

But for Singapore and Malaysia, we don't have social welfare programs. So the consequences of losing your job here is VERY bad compared to the USA. Especially if you can't find a new job in this environment.

The current "solution" to this is to reduce salary per person, instead of reducing number of people employed. This is good because unemployed people would default on debts, possibly turn to crime, etc etc... whereas spreading out the pain, ie instead of 10 unemployed people, you have 100 people who take a 10% pay cut... you instead get a much larger group of people who are still solvent and make enough to eat, who merely cut back on spending a little.

OR, possibly cut back on spending A LOT. In fact, it is possible this "solution" will cause consumer spending to drop even more than layoffs would. Why is this? It's because the average consumer is burdened with debt. Far more debt than their grandparents or great-grandparents would ever dream of saddling themselves with. And also fixed payments, like insurance and EPF contribution.

Well, I'd better just draw out how this works with an example. Let's take a company with 1000 workers. Each has RM3000 salary. They have over RM100,000 in loans ie housing, car, credit cards, for which they pay around RM1000 monthly. Their insurance, EPF and other monthly fixed expenses around RM500. They spend around RM1000 on necessities like FOOD, water, electricity, phone bills, petrol... leaving them with RM500 disposable income to be spent on things like clothes, outings, and other non-day to day essentials.
So consumer spending is around RM1500 per person=RM1.5million total.

1st scenario. 100 people are fired. 900 people remain. The effect would be: 90 people more or less maintain similiar spending habits. 10 people declare bankruptcy, or just sell everything and move to some cheaper locale and get a lower paying job... let's say they will on average end up with RM1000 incomes... enough to survive, basically. So, overall consumer spending= RM(1500x900) + (1000x100) = RM1,450,000. A drop of 50k. In other words, the fall in employment salary was borne mainly by the loan, property, insurance and EPF.

2nd scenario. 1000 people take a 10% paycut. The likely effect would be: 1000 people take a RM300 cut in disposable income. Overall consumer spending drops 300x1000 = 300k. In other words, this fall will be 100% borne by those who sell non-essentials.

...

In other words, for Malaysia and Singapore, under this "solution"... this is going to be a really terrible time to be selling luxury goods, or basically any non-essential items.
These sort of figures mean we're looking at a possible fall in sales of over 50% for all those clothes boutiques, shoe shops, computer shops, entertainment outlets...

These groups of businesses are always the hardest hit during a recession, so poor sales from them would hardly be a surprise.

However, my point is that these businesses will be utterly smashed by this technique of "spreading out the pain". Instead of losing 10% of their customers outright, they will face 100% of their customers reducing business by 50%. Pain.

Oh, BTW. This is going to be a huge blow for the auto-industry. When people take a pay cut, they definitely postphone buying a new car. You just become unable to make the monthly installments.

I think that Supermarkets like Tesco and Giant will do well in this environment, as people will be shopping for the cheapest deals. Also, more people will be choosing to cook their own meals. It's cheaper, and hey, after all, they so much more free time, due to all the shorter working hours, right?