Stock Taking 1

As a child, I always look forward to the coming Chinese New Year. Reasons: Lots of food, ang bao, and new clothings. Sadly, for most part of my recent years, the food isn't cheap (all food bills footed by me), the ang bao received are decreasing compared to the ones I received, and ... new clothings aren't cheap.

Why?

Well, for a start, I have to pay for the mandarin oranges as well as the "bak kua", not to mention other types of goodies. Next, I prepared in the region of $800 for ang baos (some for my parents, some for parent-in-laws, and the rest for other 'outlaws') but I always received less than $800. Man...it is a money-losing business!!!

Now, as for new clothings, most of my shirts are tailor-made. On average, I arrange for 5 sets of link-cuffs shirt made every 6 months, plus a pair of black pants. On the record, I still have around 4 pairs of brand new pants in my closet!!!

Perhaps the only people that are happy during this Chinese New Year are the kids, and ... my tailor!

Fed's Cut As Expected

Once again, our dear Federal Reserve stepped in and made a half-point rate cut, a move that Wall Street (and me) apparently liked :)

I know you know that many also know that the rate cut didn't come as a complete surprise, as the stock market had been banking on it. They just weren't sure if it would be the half-point cut, or a more cautious quarter-point. The move today puts the federal funds rate target at 3%, the lowest since June 2005!

Once the cut was announced just now, the stock markets went positive: within minutes of the decision, the Dow Jones industrial average jumped more than 100 points at one point. The S&P 500 and Nasdaq also rose following the report.

Well, it's positive news (at least for a while), but between this latest cut and last week's unexpected three-quarter point cut, will it be enough to rejuvenate the economy? Let's wait and see. To me, it has been more waiting and less seeing.

Interestingly, the Dow turned right around, gave back every penny of its gains, and ended the day DOWN 37 points at the closing bell! Why? Because most investors in the street aren't dumb. They know what's going on in their own neighborhoods. They see the handwriting on the wall in the headlines. And they realize Bernanke's caught between a rock and a hard place.

On one hand (the rock), the US economy is sinking very slowing, but surely. Home construction plunged 24% in the fourth quarter, the worst since 1981! The economy sputtered to a virtual standstill in the fourth quarter, crawling at the anemic pace of just 0.6% per year! And for the entire year, GDP growth was the worst since 2002, then when the economy was suffering from the aftermath of 9-11, a tech wreck, and a wave of scandal-ridden corporate bankruptcies — all at the same time!

On the other hand (a hard place), resurging inflation that only gets worse as the Fed cuts rates and pumps more money into the market. My favourite inflation hedger, Mr Gold, is my best indicator. Gold is on fire, surging another $7 just today! The U.S. Dollar Index got killed today — down 75 basis points on today's Fed rate cut alone. And then in November, we saw the most dramatic surge in wholesale prices in 22 years! Finally, import prices surged by a staggering 10.9%, signaling much, much higher inflation ahead!

This is serious!
This is scary!!
This is shocking!!!

It means that long before the Fed's rate cuts begin to have the desired impact on the economy, they're already beginning to backfire with more inflation. Do you see it now? Are you selling too? I am, and I suggest you do the same, at least for short term. Leave emotion out of the equation. Just clear your stock holdings and keep at least 70% cash, 20% Bonds, & 10% equities if you must.

Good luck, or else, good bye!!!

Until the Day's Out

"Measure not the work until the day's out and the labor done."

Elizabeth Barrett Browning
(1806-1861)
English poet

Stay Alive!

There is a remedy for everything except death.

- A French Proverb

So stay alive and you can pull through anything. Death may be near or far, but the choice to work at something worth working is yours to take today. Stay focus and stay alive!

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.