Isn't It Immoral to Loot Anymore? - Oh Wall Street Ethics!

Chief Investment Officer, J P Morgan Chase lashes out on US investors calling them "predictably irrational" and "stupid". This he did  in an interview given to Forbes magazine few days back. What cheek!! Calling majority of 95 million US investors as "stupid" and "predictably irrational"? This is after what the Wall Street bankers did to willfully defraud common investors? We all know what happened to investors in 2008 sub prime mortgage crisis in US. Who were the actual brains behind the global meltdown that followed? To arrive at an answer let us analyse the sub prime crisis step by step that brought the world dangerously close to the Great Depression era. By the way, what we see today as turmoil in financial world across nations is majorly gifted by the sub prime crisis. And Lord knows how much more pain world has to endure before the venom of sub prime crisis gets thrown out completely from the system! But first let us focus on the genesis of sub prime crisis.

Sub prime crisis started with mortgage companies giving loans to American public at near zero interest and with no due diligence and no collateral. This led to a boom in economic activity as homes were sold like hot cakes. The mortgage companies were fully aware that most of these loans were going to default because these loans were mostly given to people with little or no repaying capability. That is why it has been exotically termed as loans to Sub Prime (below Prime) borrowers, meaning borrowers with very poor credit history and below par repaying capacity. They went so far as to having no document check for the sub prime borrowers, with computer generated automated approvals given to loan applications within 30 seconds. In this format you can declare anything as your income and there will be no questions asked.

The mortgage companies therefore knew that there will be payment defaults. Initially when the default started, the housing market in US was booming. So the mortgage companies gave away mortgage loans for second time to defaulting borrowers against their homes to pay off their first mortgage. It was a win-win-situation for all since the property prices were rising fast and furious. The exponential rise in property prices was forming a housing bubble, and any bubble has to burst sometime or the other. This fact was known to financial wizards in the mortgage companies.

Time was running out. So to wriggle out of this imbroglio, these mortgage companies went to the omnipotent and omniscient investment bankers of Wall Street to bail them out of their impending doom. And thus a devious and intricate plot was hatched by big daddys of Wall Street.

Mortgage Backed Securities(MBS) : The investment bankers were quick to securitize the mortgage loans and pass on the risk to the buyers of these securities. Simply put they bought the mortgage loans, made  a  pool of these loans, and issued out bonds against the pool. The mortgage companies got their money back, and again went back to give out more loans to more undeserving borrowers.

Credit Default Swap(CDS) : Not content with passing on the risk to bond holders of MBS plan, they further wanted to make big bucks out of the situation of rising property prices. Thus they thought of exercising the financial instrument of CDS to make a killing. If  you are a bond holder you would like to insure yourself against the huge investment you have made in these bonds. So you get advised to buy CDS as an insurance. Suppose you have bought $1 million as mortgage bonds  and then you buy CDS as insurance,  you are required to pay annual premium of $10000(say) for such an insurance. By doing so you are insured to get your $1million in case the bond fails. CDS also allows that even if you are not the bond holder or property holder you can still participate in the housing market through CDS by speculating. Supposing you have an opinion that property prices will fall and by extension the MBS bonds will fail, then you buy CDS against these bonds, pay the yearly premium of $10000 and make a killing of $1 million as and when the bonds fail.

Collateralized Debt Obligation(CDO) : Still not content with raising mega bucks through MBS and CDS, these investment bankers devised more hideous plans to spread the risk right across the globe. They invoked CDO, a name that now sends shivers through millions of hapless investors on planet earth. All MBS and CDS were grouped into a pool, divided into tranches and sold as bonds of CDO. The tranches with least risk were given highest investment rating of AAA through rating agencies like S&P, Fitch and Moody's. The riskier tranches were given lower ratings in steps starting with AA, A, BBB, BB and B. Riskier the tranche, higher was the promised return and vice-versa. These were then sold to all financial institutions and big investors across continents as financial products, with  investment grade stamp and authority of the most hallowed names in financial world.

CDO Squared : Yet not satisfied that they have done enough, the investment bankers this time made a pool of CDOs itself as underlying asset and issued out CDO Squared. In doing this, slices were taken from CDO proper and mixed so horribly that the riskier tranches got thoroughly mixed with healthy tranches. Now the credit rating agencies had no problems giving AAA ratings to CDO Squared. Further, CDO Squared were put into a pool and made CDO Cubed and bonds issued against them. They have even gone further and sold derivatives of CDO Cubed and so on. No one really knows how far these investment bankers have gone in this game of deceit. All that one knows is that these financial products were manufactured in the factories of Wall Street and sold across the globe with investment grade ratings from the most venerable names in the rating business. Who will not buy these products, made in USA?!!

Synthetic CDO : One step further into the quagmire, Synthetic CDOs were sold which had no asset backing at all. This was the last nail in the coffin, as investment bankers on Wall Street sold Credit Default Swaps(CDS) of the already complex CDOs, terming them as Synthetic CDO.

When the housing bubble finally did burst in US, everything got complicated. The credit unworthy or sub prime borrowers defaulted and this time with their property prices plummeting, no one was ready to
re-mortgage their property. Not being able to pay the loans they vacated their homes. The banks had deluge of foreclosures, but there were no buyers for foreclosed homes. Hence there was distress selling from bankers. This led to further fall in property prices and the malaise slowly spread across to the prime mortgage market.

With such huge defaults from sub prime borrowers all derivative instruments starting with MBS and all hues of CDOs  crumpled. Anyone having exposure to these toxic assets had to book huge losses. Even those who did not have any exposure to such toxic assets were also hit. They were the pensioners in US who found out to their horror that the pension funds had exposure to these toxic assets.

All that is known to all of us. Now the question that begs an answer is this: "If derivatives is a zero sum game then how come the whole financial world is crying fowl?" If majority has lost billions of dollars ( last estimate of loss by IMF was about a trillion dollars) then who are the minority gainers. If the investment banks like Bear Stearns, Goldman Sachs, Lehman Brothers and mortgage companies like Countrywide Financial have all lost billions of dollars and had applied for bankruptcy, then who have profited those lost billions? Surely not the poor sub prime borrowers who are on the street with their homes foreclosed. I would like to provide a clue to the answer. Investment bankers working for these investment banks had in their internal emails described all these derivative instruments like MBS, CDO as worthless papers. And yet they were wilfully selling these worthless papers with gusto and guise to all investors. Before the sub prime crisis all you needed to do was to take credit default swaps(CDS) of all these exotic mortgage derivatives and you would have made billions before you could say Jack Robinson. But for that you have to be an Insider and part of a Cartel !!

I have tried to explain a very complex phenomenon of sub prime crisis in a very simplified manner. Each financial instrument has many degrees of complexity attached, which I have conveniently left out so that it is easy to understand. As sequel to this understanding, I shall be discussing about the ramifications of  sub prime crisis on world economy in my next post. We shall also try to evaluate as to how much more pain is left in the system. Till then trade with caution!

Can You Spot a Design in Market Madness? - Cartels at Work

Sixth of May 2010. A day I simply cannot seem to erase from my recent memory region. US markets plunged nearly 10% on a single day!!! Dow Jones Industrial Average crashed 1010 points from its day high. New York Times headlines screamed "Stocks Plunge on Concerns Over Greece". Investors on Wall Street are left licking their wounds and the general public sympathizes.

Concerns over Greece? What was so new about concerns over Greece on that particular day that stock prices had to be reduced to few cents and then made to rebound up to 70%  within an hour or so? By the way, financial problems facing Greece was not a new fact uncovered that very day that market players had to sell off in utter shock anything and everything in sight in such tearing hurry. In fact on 17 Dec 2009 I had published a post titled "Debt Laden Dubai - When Will The Woes End?". In that post I had indicated that Greece and Spain were simmering with debt troubles and global investors were worried more on that account than Dubai defaulting. It was common knowledge in global investment circles for the last six months or so that Greece was tottering on a serious financial crisis and would be the first of the European nations to start the Domino Effect. Now would the regulators please explain to US public as to what really happened on 6th May 2010 and who were the extraordinary beneficiaries?

One can understand European markets selling off with one or the other bad news. First from the blocks was Greece with its credit contraction, then Spain bailing out one of its banks and then Germany banning short selling - all that is understood. In between North Korea brandishes its sword on South Korea and China goes on clean up drive to rein in inflation by pulling back some stimulus packages in small measures. Perfectly fine. But what would you say when Financial Times on 26th May tells investors with all authenticity that China was going to sell its reserve of Euro bonds. China holds about $ 630 billion in Euro bonds. That news sent jitters down the spine of global investors.

The shock waves created in Europe from the shattering news in Financial Times was so great that Euro currency nosedived and almost became  serious competitor of Zimbabwean Dollar!! With it the European stocks were dragged down and US exports to Europe presented a great challenge. Pandemonium broke loose in global investment circles. Dow Jones lost 230 points from its day high. Investors were planning their exit strategies further when the very next day China in a surprise move rubbished the news of Financial Times and reiterated its faith in Euro and the European Union. European markets and Euro rebounded with zest and Dow Jones gathered 295 points extra weight.

In all this high drama, one thing stands out very clearly. Influential parties will go to any length and pull off any stunt to browbeat the investors. How can Financial Times, the venerable publication of global markets, be so callous as to publish a news which is so far from the truth? Who are responsible for painting such panic-setting scenarios? Has Financial Times apologized to the investors and to its readers? Will market regulators take some time off their busy schedule and look beneath the cover? Bizarre things are on the cards in global markets. There will be more rude shocks and many more deceptions. Wild swings will tear short term  traders apart on both sides of the trade. Welcome to the Year of Volatility, because cartels are at work with a vengeance.

I will be providing more evidence of big boys of Wall Street who are working in cahoots with other big global players to swindle billions from honest investors. Watch this space for more on this issue of cartelization. Till that time just mull over the news that Wall Street investment banks have engaged lobbying firms for close to $ 450 million to block financial bank reforms in US. You will get to know more about big boys of stock markets and their Machiavellian plans in the sequel to this article. God save US investors!!

Is World Around Us Crashing? - Saga of Difficult Times

22 May 2010. Saturday 6.30 AM. Mangalore Airport in Southwest of India. Air India flight from Dubai landed, overshooting the landing zone and crashing to the valley below. The plane broke up in two and erupted into a huge plume of flames, killing 158 passengers and the entire crew. Eight passengers survived miraculously  by jumping out of the ill-fated craft, just before it turned into a fireball. Sad sad day for India and the aviation fraternity. Our hearts go out to the families and friends of the bereaved. Investigations to the crash are on but one hopes that we find the exact reasons of the crash and implement the suggested reforms and safety measures to avoid such unwarranted accidents involving loss of human lives in future.

Away from the real world, even the financial world around us seems to be crashing. There is mayhem on the street as indices across the board are developing the habit of dropping 4% to 8% in single day's trading. Across the globe the events unfolding around us are quite unpleasant which have again turned this financial crisis into a pandemic contagion. From US to Europe to Asia, no financial market or asset class is being spared. Again the big guns of the financial world are behaving as if there is no tomorrow. There is a creeping feeling that czars of the financial world are up to their old ways of working in cartel, forcing volatility to be unimaginably high. Otherwise how can you explain Dow Jones losing 1009 points from its day-high and then gaining 651points from day-low on the fateful day of 6th May 2010. I call it fateful because I feel we should spare a thought for the retail investors in US who had to sell off their holdings thinking the Judgement Day was here, only to find that market has recovered 65% on the same day.

You can tow the official line of the Wall Street and believe that it was was glitch in the computer system, or someone inadvertently pushing the sell button. I really think these Wall Street guys have some guts, bandying out such outlandish explanation to what was clear work of cartelization. Here we are not discussing market index of some Banana Republic but market index of the most sophisticated and developed market on this planet. How can regulators in US take it lying down, because exactly after 10 trading sessions Dow Jones again fell to almost same low of 6th May but after first rising 140 points above the day high of 6th May. All this drama being enacted within a span of 12 sessions and yet the US regulators are uncannily silent on the issue. If such an incident had happened in any emerging market then thousands of censures and advisories would have been issued by the regulators and credit rating agencies. But this is Wall Street and they have the license to do anything to swindle the hapless retail investors.

The point I am trying to make is that irrational volatility is here to stay for some time, because bigwigs of the financial world have swung into action and they will do whatever to make market participants bleed both ways. Market bias is negative but beware of wild swings. Presently for investors in Indian market the key level to watch is Nifty 4842, which should not be violated  if market has to move up from current level.

Harvesting Time in Intra-day Futures Trade : Through Stockezy

In my last post I had mentioned about this community investment platform called Stockezy (http://www.stockezy.com/) where investors in stock markets help each other to firm up their own investment decisions. And lately I have been closely associated in rendering advice to this community. In the following paragraphs I would like to illustrate the nature of  my recommendations and the outcome of such calls.


On this day of 22nd April 2010, volatility ruled the roost in Indian stock markets. One must admit that it was a tough day in office for traders. What started off as a uninspiring and unsteady rise from day low, accelerated into a  spectacular bull charge at around 11AM. And from 1.30PM to 2.30PM markets threatened to break free from day's high of 5332. But that was not to be. Quite contrary to expectations, markets tumbled suddenly and dramatically to retrace almost all the intra-day gains, catching most traders on the wrong foot.


If we analyze intra-day movement of Nifty, we find that Nifty rocketed from day low of 5221 to a high of  5332. This means that Nifty notched up an intra-day gain of 111 points from day low. But from day high it plummeted to 5246 in the last hour of trade, which means that Nifty lost 86 points from day high. At close Nifty managed to lift itself by 20 odd points, but the damage was already done. Bulls were caught on the wrong foot and there was no place to hide for many long-side-intra-day-traders.


Against the backdrop of circumstances just described, let us now evaluate the performance of intra-day trades in stock futures which were executed as per my recommendations. Today I had given two sell calls of stock futures during market hours. This was at a time when the market was reverberating  with the sound of bulls all around. Many may think that as an act of bravado or even misplaced defiance. But before jumping to any conclusion, it will be my earnest appeal to thoroughly examine the performance of these sell calls:-

1. Siemens Apr Futures:- Recommendation was for selling one lot between 734/736 for target of 725 with stop loss at 738. The scrip made a day high of 735 and fell sharply to hit the target. The point to note here is that in a raging intra-day bull market, the high of the scrip was exactly within the recommended sell price range. It was a Rs 2/- range given for a scrip worth  730 plus and yet the scrip could not break free of this tight sell range. Moreover, notice the tight stop loss of just Rs 2/- above the recommended selling price.
Now for calculating profit, if we take the average of the recommended price range then our sell price works out as 735. This sell position met the given target at 725, thereby accruing a profit of Rs 10/- per share. Since the lot size is 752,  total profit  = 10x752 = 7520/-


2. India Infoline Apr Futures:-It was recommended to be sold between 117/118 for target of 115 and stop loss of 119. The scrip reached a high of 117.35 and then started falling. As the scrip fell, the target of 115 was met. If we take a careful look, here again the scrip could not break out of the recommended selling price range of 117-118. Even the stop loss given was only Re 1/- above the selling range.
For the purpose of calculating profit it is assumed that one could sell at 117.25 and then covered the position at given target of 115. Since the lot size is 2500, total profit = 2.25x2500 = 5625/-


Overall profit in intra-day trade from selling two stock futures = 7520+5625 = 13145/-

Stockezy - Sharing Community Sentiments For Investment Decisions

To all my followers and readers I owe an explanation for being so quiet for so long. One might ask as to where I have been all these days and I'll have a tough time answering satisfactorily. I will sound indifferent if I tersely say that I have been busy. But that is the complete truth, standoffish as it may sound.

I have been busy connecting to a community of 15000 plus members who are into investing in stock markets in India. This community interacts at a platform hosted by http://www.stockezy.com/ which is fast becoming the leader in this novel concept of community investing.

As a social networking platform for investing in stock markets, Stockezy  can also be termed loosely as Community Investing Fund, akin to Mutual Fund. The essential difference is that here every member is a Fund Manager controlling his own funds. The community aspect only helps each Fund Manager to tap intellectual resources of other members of the community, which in turn helps him in firming up his own mind before making any stock market investment.

As Stockezy grows in strength, the following announcement from the site reaches the length and breadth of India, echoing across various dailies and financial newspapers and periodicals:-

Social network to connect, educate & empower investors.

Stockezy is an effective platform where investors help investors and work together to make informed financial decisions. Whether you are a seasoned trader or new to stocks; Stockezy is the place for you.


You may check out my contribution to http://www.stockezy.com/ , a pioneer site on social investing on internet, by following  the links given below:-
http://www.stockezy.com/opinions/5903/outcome-of-buying-stock-futures-intra-day-on-19th-april/

http://www.stockezy.com/opinions/5829/result-sheet-for-trades-in-march-2010/