True Brilliance is...

True brilliance is not a function of understanding one's view of the world and finding order, logic, and spirituality in it.

True brilliance is understanding that your view of order, logic, and spirituality is what created your world. And therefore being forever capable of changing everything.

Got the view now?

World Largest Bond Insurer Collapsing

Ambac and MBIA, the two largest bond insurers in the world, are careening toward collapse. Barring a miraculous rescue, their demise could promptly deliver a massive blow to the U.S. bond market, and severely damage America's already shaken big banks, and largely trash the net worth of millions of investors.

Just this past Friday, soon after the closing bell in New York, the watershed event happened: Ambac lost its triple-A rating! Fitch slashed Ambac's rating by two notches to AA, downgraded the long-term rating of Ambac's parent company by three notches, and said more cuts could be on the way.

Since the ratings of insured bonds are tied directly to the ratings of the insurer, Fitch was also forced to take action on the 137,000 bonds that are covered by Ambac, setting off a veritable ratings massacre in the market for municipal and mortgage-backed bonds.

Now, based on the current market price of credit swaps (bets on future defaults), Wall Street itself believes that the chance Ambac and MBIA will avoid bankruptcy is less than one in three. Next, brace yourself for the other shoes that could soon be falling. There are at least 6 of them coming our way:

First, the other two leading rating agencies — Moody's and S&P — are likely to follow Fitch's lead and also downgrade Ambac. In fact, on Thursday, Moody's already warned it could do so very soon.

Second, the other major bond insurers, such as MBIA and FGIC, will get smacked with downgrades.

Third, the ratings massacre now taking place in Ambac-insured bonds will spread to $2.3 trillion worth of municipal bonds, mortgage-backed bonds, plus asset-backed bonds packed with credit card and auto loans.

Fourth, $45 trillion in the world's fastest-growing type of derivative — credit default swaps — will be in jeopardy. Indeed, according to Friday's Wall Street Journal:

"The turmoil on Wall Street is beginning to rock a foundation of the financial system: the ability of institutions to make good on their many trades with one another."

"Today, a struggling bond insurer, ACA Financial Guaranty Corp., will ask its trading partners for more time as it scrambles to unwind more than $60 billion of insurance contracts it sold to financial firms but can't fully pay off, according to people familiar with the matter. The contracts were intended to protect Wall Street firms from losses on mortgage securities and other debt they own."

"The problem is that the insurer itself is teetering — with repercussions across the financial world. Some of its trading partners, called counterparties, already are writing off billions of dollars because of its inability to pay ..."

"This has investors and regulators worried that, through such swaps, some market players could spread their own problems to the wider financial system ..."

"The issue is raising broader concern among regulators and investors over what Wall Street calls 'counterparty risk,' the danger that one party in a trade can't pay its losses. ..."

Fifth, virtually all credit ratings, whether tied to bond insurers or not, will come under intense scrutiny. The reasons are twofold:

a) Deteriorating finances: If you're running a bank, a hedge fund or a major brokerage firm, and most of your trading partners get swiftly downgraded, your credit rating will also have to be slashed.

b) Declining investor confidence in the accuracy of the ratings themselves: If you're an investor and you see thousands of ratings falling like flies, you're going to seriously doubt the accuracy of every rating under the sun.

Sixth, the crisis could spread to hundreds of trillions in other derivatives beyond credit swaps.

Don't wait! The collapse of bond insurers, bond ratings and credit swaps is moving quickly. And it's accelerating. Don't underestimate its magnitude! This is not an isolated crisis. It could have an impact that's at least as large as the housing bust or the recession.

You can start doing something still. Greatly reducing your exposure to most U.S. stocks and bonds. Personally, I will take a 50-20-30 line-up:

50% Bonds, 20% Cash, 30% Equities.

Remember: Beware of those who might try to dismiss the warnings as "gloom and doom." Instead, just look at the facts. Then make up your own mind.

Best of Trading, God bless!

Statistics is like a Bikini

Statistics is like a Bikini; what is revealed is suggestive, but what is concealed is vital.

-Unknown

That's why you should not be paying too much attention to the media. Do your own research and uncover for yourself the vitals. Then go make the right decisions.

Never Mind the Rest

"Believe there is a great power silently working all things for good, behave yourself and never mind the rest."

Beatrix Potter
1866-1943,
Author and Illustrator

Which Bond to Buy?

With the current uncertainties in the market, it is difficult to predict which way she will go over the next one to three months. If you think about the tough decisions regarding equities, the proponents in the opposite camps (the fixed income groups) are not having any easier space. Just look at the universe of bond funds and you will realize that getting into bonds is not as easy as getting a Char Siew Pao at your local 7-11 friendly store.

(Oh yes, by the way, if 7-11 store claims that they never closed, then why are there locks on their doors? I am still puzzled till this day? Any one knows?)

Question is: Are we done with the correction yet?

Answer: Wrong question!!!

A better question is "Are we done with the misplaced confidence in the bull market yet"?

This market is due for a crude awakening. When that realization dawn upon investors, the flight to safety will commence and then the market will start to have another set of concerns: Where to re-allocate?

Bonds have not fare well over the last 4 years (compared to equities). Will they perform now? If so, which one? Global or regional? High yield or high grade? Which fund houses? What about my local governement debt securities?

Looking at the above chart, you will find that some bonds are valued higher than others, but with much lower volatility. Now, volatility is not a bad thing. You need to manage it. Others offer value now but inherently have higher volatilities. The key is balance. If you are already in a balanced portfolio, then balance your balanced portfolio. There is much allocation to be done even within the bond segment. So take a look again at your bond holdings. It pays.

Good luck.

The Risk of Love

The Risk of Love
(by Kris Hydmore)

There is a risk involved in everything
Every time you share a smile
Every time you shed a tear
You are opening yourself up to hurt.
Some people tread slowly through life,
Avoiding the closeness risk brings,
Side-stepping the things they can't understand
Turning away from those who care too much,
Those who care stay too long,
Those who hold too tightly.
There is never an easy way to love
You cannot approach it cautiously
It will not wait for you to arm yourself.
It does not care if you turn away
It is everywhere, it is everything.
Love is the greatest of all risks.
It is not reliable, it is not cautious,
It is not sympathetic
It is unprejudiced and unmerciliess.
It strikes the strongest of mind,
And brings them to their knees in one blow.
Even in the best of times, love hurts.
It hurts to need, it hurts to belong,
It hurts to be the other part of someone else,
Without either of your consent.
But, from the moment it overtakes you,
It hurts worse to be all alone.
The risk of love never depletes;
It grows stronger and more dangerous with time.
But, it's in the total surrender of all defense,
That we, no matter weak or strong,
No matter willing or captive,
No matter what, we truly experience love.
Despite the many things love is not,
Outweighing it all are the things that love is.
Love is surrender without a loss.
It is a gift without the cost.
It consumes your every thought & desire,
Every breath you take.
It is the fire that fuels you
To do more than pass through life;
It urges you, instead, to live.
No matter the outcome, having felt love,
You will never be the same.
It may scar your heart & soul
And Leave you only memories of forever.
Or, it may cause every day of your life
To feel like there is no need for tomorrow.
But, love is worth it.
It is worth the risk...
For in all of life,
Love is truly the only risk worth taking.

Love is like Bread.

Love doesn't just sit there, like a stone;
it had to be made, like bread, remade all the time, made new.

Ursula Le Guin