Archive for November, 2011

Italian 10 year Yield Rises Above 7.4%, Country Theoretically Unable to Fund Itself at These Levels (Bankrupt), Prime Minister Offers to Resign

Wednesday, November 9th, 2011

November 9, 2011: After Italian Prime Minister Berlusconi offered to resign yesterday, the credit markets almost sighed in relief. But today, markets were punched in the jugular as LCH.Clearnet increased margin requirements on Italian bonds. Margins were raised because 10 year credit spread exceeded 450 bps, the same point at which Clearnet raised margins on the bonds of other peripheral countries in Europe.
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The pressure is certainly on the ECB and Italy now to find a solution to this debt crisis, as Italy is too large to be bailout out. Yesterday, known for his sex scandals and political corruption, Prime Minister Berlusconi was pressured to leave his post because Italian yields were creeping above 6.5%. According to the Times, “In the end, it was not the sex scandals, the corruption trials against him or even a loss of popular consensus that appeared to end Mr. Berlusconi’s 17 years as a dominant figure in Italian political life. It was, instead, the pressure of the markets — which drove Italy’s borrowing costs to record highs — and the European Union, which could not risk his dragging down the euro and with it the world economy. On Wednesday, yields on 10-year Italian government bonds — the price demanded by investors to loan Italy money — edged above 7 percent, the highest level since the adoption of the euro 10 years ago and close to levels that have required other euro zone countries to seek bailouts.”
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Currently, the Italian 10 year yield has exceeded 7.4%, and the 2 year note has risen more than 10 year rate. At this point, Italy is theoretically unable to fund itself and could theoretically be bankrupt. The margin call on bonds due between seven and 10 years was raised by five percentage points to 11.65%, for bonds due between 10 years and 15 years it was raised by five percentage points to 11.80%, while for bonds that mature in 15 years and 30 years the margin call was raised by five percentage points to 20%. The changes come into effect Nov. 9 and will have an impact on margin calls from Nov. 10, the French arm of LCH.Clearnet said.

Chinese Debtors Offer Fingers to Loan Sharks

Monday, November 7th, 2011

November 7, 2011: Loan sharks have been a problem in the Western World for centuries. From traditional Vegas sharks to payday lenders, the poor have been subject to atrocities by creditors for years, despite government intervention. The situation today is no better for China’s small entrepreneurs. Many businessmen have been forced into bankruptcy recently as local credit has been tightening. Not able to withstand public humiliation, some choose suicide, while others find themselves under the burden of creditors and “tattooed thugs.”

According to a recent Businessweek article, Zhong Mong, a Chinese pharmacy owner, offered his fingers to a group of private lenders because if they repossessed one of his stores, it would be impossible to pay back another 130 small local creditors, many of whom are local friends and neighbors. Zhong had borrowed 30 million yuan or $4.7 million at rates as high as 7% per month to expand his franchise!

Similar to the U.S., small and medium sized businesses account for 80% of jobs in greater China, but these businesses always find it difficult to obtain local bank financing. Other forms of financing are often much more expensive, leading to complications and often default. Since April, at least 90 CEOs have fled Zhong’s city of Wenzhou for the same reason. The 400,000 businesses in the city are facing higher costs because of inflation and soaring black market interest rates because of the sudden credit squeeze. Imagine how fast a business must grow to pay Zhong’s 7% monthly interest…


Black market interest rates have doubled this year, growing faster than local profits. Informal lending has given rise to real estate developers driving prices ever higher, leading to more inflation. Similar problems have also surfaced in the industrial province of Guangdong, to the South.

Wenzhou is home to 9 million Chinese and produces 90% of China’s eyeglasses and lighters. Many residents of Wenzhou take out bank loans at 1% per month and lend out money at 2%+ per month, pocketing the difference. China’s official lending rate is only 6.56%, compared to rates between 20-40% that small businesses are charged here.

Local suicides have prompted Premier Wen to visit the city and pledge to raise bonds to help finance smaller businesses, even if NPLs are higher. Unfortunately for Zhong, it may be too late. He will probably lose his business and will be hired as a paid manager. He and his wife will probably have nothing left.

Occupy Main Street, Restructure America

Sunday, November 6th, 2011

November 6, 2011: It has been almost 4 years since the United States and the entire Western World has been mired in this recessionary state. What has happened should not be a surprise to anyone. After scrambling for an ever higher quality of life, sending labor-intensive industries overseas, and losing more than 2.5 million manufacturing jobs and more than 850,000 professional service and information sector jobs to outsourcing, we foolishly blame our government and the top 1% of our earning population for our hardships. Most Americans lack the skills and motivation to innovate, and are fit to work only in commoditized industries, yet most of our commoditized industries have been sent overseas. The government has unsuccessfully spent trillions on the economy to lessen market volatility, to reassure pensioners, to bolster bank and corporate balance sheets, and to create jobs. Over the past 10 years, spending growth for prisons has risen at a rate 6x the rate of spending on education because this society simply does not value education as much as it should. The truth of the matter is, we are all to blame. After inflating real estate and securities prices through leverage, after fighting senseless wars in pursuit of oil when we have enough natural gas reserves to last 200 years, and after allowing an entire generation of our citizens to lose their values of hard work and integrity, we ALL are to blame.

Instead of pushing our children to embrace globalization, we have allowed them to grow up isolated from the rest of the world. Instead of encouraging them to be productive and to earn their own keep from a young age, we have allowed them to spend hours watching brainless television and to lose themselves in drugs and alcoholism in communities where families aren’t the norm and divorce rates are greater than 70%. Instead of building secure homes, we have a bred a completely confused generation just asking to be taken advantage of by the rest of the world.

We need to OCCUPY MAIN ST.; we need to restructure America, the American lifestyle, and the American mind before it’s too late. We need to instill passion for innovation and entrepreneurship, we need to teach our children practical skills and make sure that they are proficient in math and science, we need to encourage competition, and we need to instill the values of hard work and integrity into our youth so they can grow up to be proud and self-sufficient.  No able bodied person should feel entitled to anything material in life without providing value or giving back to society.

Today, there are 45 million Americans on food stamps.



The number of very poor Americans (those at less than 50% of the official poverty level) has risen to 6.7%, or to 20.5 million.  This is the highest percentage of the population since 1993.  At least 2.2 million more Americans, a 30% rise since 2000, live in neighborhoods where the poverty rate is 40% or higher. Last year, 2.6 million more Americans descended into poverty, which was the largest increase since 1959.  In 2000, 11.3% of all Americans were living in poverty; today 15.1% of Americans are living in poverty. The poverty rate for children living in the U.S. has increased to 22%. There are 314 counties in the U.S. where at least 30% of the children are facing food insecurity. More than 20 million U.S. children rely on school meal programs to keep from going hungry. In 2010, 42% of all single mothers in the U.S. were on food stamps. More than 50 million Americans are now on Medicaid. One out of every six Americans is enrolled in at least one government anti-poverty program. I agree that we should help the poor and that compassion is a virtue, but shouldn’t these people help themselves as well? What specifically has caused their plight? Is only the government to blame? Are only the rich to blame? No, of course not.


Inflation adjusted wages have not grown since 1999, the S&P 500 is at 1998 levels, and real estate prices are at 2002 levels.  It is up to us to realize what caused the “lost decade” and avoid a “lost century.”

Why has this happened? By the 1970s, the average American was 20x richer than the average Chinese person. Today, it is only 5x. The Western world rose to power because “they had laws and rules invented by reason.” Our institutions, our basic freedoms and property rights, our discipline, and our motivation to work hard created $130 trillion of wealth in the Western World. Unfortunately, we have lost our work ethic and our intellectual drive. The average Korean works 1,000 hours more per year than the average German. The Chinese soon will have filed more intellectual property patents than the Germans. This is the END of the great divergence between the West and the East. There is little that differentiates us from the rest in a world that is being forced to understand the idea of resource scarcity more than ever before.

In 1776, Adam Smith, in The Wealth of Nations, explained how the East lagged behind because it lacked capitalism and property laws. Niall Ferguson explains how in addition to this, Competition, Applied Science, Property Rights, Modern Medicine, the Consumer Society, and Work Ethic propelled the West into prosperity:

[youtube]http://www.youtube.com/watch?v=xpnFeyMGUs8[/youtube]

This video link by Niall Ferguson shows why the Western world may lag behind as emerging market nations continue to gain in global wealth.

I am sick and tired of watching Occupy Wall Street protests. Stupidity should not be tolerated; we should educate the rest and Occupy Main Street. I asked a protester two weeks ago why he was protesting, and he could not give me a straight answer. His parents unfortunately didn’t teach him the values of hard work and self respect. It reminds me of the guy in this video asking for “millionaires & billionaires” to pay for his college tuition: [youtube]http://www.youtube.com/watch?v=wrPGoPFRUdc&feature=share[/youtube]

Contrast that young man with this young Asian immigrant, who hasn’t been able to set up his business properly in 2 weeks because of the protesters blocking access to his food cart:

[youtube]http://www.youtube.com/watch?v=ZxaUgI0Ascw&feature=related[/youtube]

I can’t believe I would ever say this, but even Ari Gold knows better: [youtube]http://www.youtube.com/watch?v=3Ajh8zKPMXc[/youtube]

MF Global Files for Bankruptcy and Plunges in First Day of OTC Trading

Wednesday, November 2nd, 2011

November 2, 2011 - MF Global (NYSE: MF) tumbled in its first day of over-the-counter trading after the futures brokerage filed for bankruptcy, prompting the New York Stock Exchange to delist the shares.  MF Global’s bankruptcy is the 8th largest bankruptcy of all time.

The stock, quoted under the symbol “MFGLQ,” declined 83 percent to 21 cents at 12:45 p.m. New York time on trading volume of 170.9 million shares. MF Global plunged 67 percent last week as the New York-based firm reported a record $191.6 million quarterly loss.

MF Global stock hasn’t changed hands during a regular trading session since Oct. 28. NYSE Euronext suspended the stock before the New York Stock Exchange opened on Oct. 31. MF Global filed the eighth-largest U.S. bankruptcy this week after failing to find a buyer over the weekend. The futures broker suffered a ratings downgrade and loss of customers after revealing it had investments related to $6.3 billion in European sovereign debt.

The night before MF posted its biggest quarterly loss, triggering a 48 percent stock plunge, Chairman and Chief Executive Officer Jon Corzine appeared at a steak dinner at New York’s Helmsley Park Lane Hotel for a speech to a group of bankers and traders.

“There was no sense at all that there was impending doom,” Kenneth Polcari, a managing director of ICAP Corporates, said of Corzine’s Oct. 24 address to the National Organization of Investment Professionals. “He gave a spectacular speech” about his decades at Goldman Sachs, life as a U.S. senator and New Jersey governor and his return to the private sector. “He’s had a full life, up until now.”

Corzine, 64, excused himself before the main course was served, saying he had to prepare for an earnings call the next day, said David Shields, vice chairman of New York-based brokerage Wellington Shields & Co. and a former chairman of the organization. The group seeks to foster “a favorable regulatory environment,” according to its website.

Timothy Mahoney, CEO of New York-based Bids Trading LP, said Corzine’s speech was “delightful.”

The next day, MF Global reported a $191.6 million net loss tied to its $6.3 billion wager on European sovereign debt. On Oct. 27, after the company’s bonds dropped to 63.75 cents on the dollar, Moody’s Investors Service and Fitch Ratings cut the firm to below investment grade, or junk. Unable to find a buyer, the company filed for bankruptcy on Oct. 31, the first major U.S. casualty of the European debt crisis.

‘Serve the Public’

At least two dozen U.S. lawmakers and regulators, including Representative Joe Barton, a Texas Republican, Carolyn Maloney, Democrat of New York, and former Securities and Exchange Commission Chairman Harvey Pitt have addressed the group, according to its website.

“There are many people in the group that do lobby and talk to regulators,” Shields said. “You talk to regulators, you talk to lawmakers and you try to get the points forward, things that will help the marketplace, that will serve the public.”

The group’s board includes head traders at firms such as Waddell & Reed Financial Inc., whose futures trade triggered the flash crash of May 6, 2010, according to a study by the SEC and the U.S. Commodity Futures Trading Commission.

Its members’ firms “trade approximately 70 percent of the institutional volume transacted daily in the New York and Nasdaq markets,” according to the website.

‘Difficult’ Day

The group’s current chairman, Dan Hannafin of Boston-based investment manager Wellington Management Co., declined to comment on the dinner. Corzine and Diana DeSocio, an MF Global spokeswoman, didn’t reply to an e-mailed request for comment.

Mahoney said he appreciated Corzine’s ability “to compartmentalize” and speak engagingly last week. Mahoney’s firm, Bids, runs a private trading venue known as a dark pool, and is a joint venture of banks including Goldman Sachs.

Before the speech, Moody’s cut MF Global’s credit ratings to the lowest investment grade. Polcari said there was one reference to Corzine’s “difficult” day.

While he was “cordial” and “positive,” the MF Global chief lacked his typical “sharp bounce,” Shields said. Corzine is “a member of the community,” and could be invited back after the bankruptcy, he said. “People go through bad times.”

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

Learning Spanish for Business – CBS Online Lessons 4-80

Wednesday, November 2nd, 2011

Finally, to aid your understanding of basic Spanish, we are now including lessons 4 through 80 from Coffee Break Spanish (.mp3 links are included at no cost below). These are excellent podcasts that are both entertaining and educational. After listening to these lessons at your leisure in the home, at work, in the gym, or while running, one should have a basic understanding of conversational Spanish.  For those who have learned Spanish in school, this should serve as a good review and should help one strengthen his or her accent. All of these .mp3 files can be downloaded by right-clicking on the file and saving on your desktop. The files are also available for free on http://radiolingua.com. These links may only be accessible on LA’s blog…they may not be available in syndicated versions of this article.

cbs-42-guide

Learning Spanish for Business – CBS Online Lesson 3

Wednesday, November 2nd, 2011

To follow up with the previous entry on learning Spanish for business, we are including the third lesson audio (only accessible on LA blog) from CBS.  We are also including the corresponding PDF below, which goes through how to address superiors in a formal context, how to ask someone’s name, and how to ask where someone is from:

cbs-03-guide

Learning Spanish for Business – CBS Online Lessons 1 & 2

Wednesday, November 2nd, 2011

The Leverage Academy team has increased its efforts in targeting the Latin American market, as more financial firms enter the region because of robust growth and legal reform. For example, since Brazil’s credit rating was upgraded above investment grade in 2008 by Moody’s, hot money flows have increased dramatically from institutional investors. For it’s surrounding countries, a commodity rally has also contributed to economic growth. The bulge bracket banks have increased their exposure to the region as well.  For example, in the Latin American derivatives market, Barclays and Socgen hold the strongest positions.  JPMorgan, UBS, and HSBC also have strong Latam coverage groups. In an effort to help our readers practice their Spanish, we have included a link here for free Spanish lessons online using CBS – Coffee Break Spanish. The first lesson audio (link only available in blog entry) goes over greetings and salutations. You can listen at work or during a lunch break. The second lesson audio elaborates on basic conversation. The corresponding PDF is below:
cbs-02-guide

This PDF goes over greetings, saying goodbye, introducing yourself, and informal greetings. Enjoy!  Hasta otra!

Defined Benefit Plans & Defined Contribution Plans (CFA III) – 2

Wednesday, November 2nd, 2011

In our previous blog on pensions, we discussed defined benefit plans, defined contribution plans, cash balance plans, and profit sharing plans. We discussed funded status, ABO, PBO, future liability, retired lives, and active lives.

It is vital for the CFA III curriculum to understand the difference between defined contribution plans and defined benefit plans in more detail:

In a defined benefit plan:

  • The employee receives periodic payments beginning at retirement based on an eligibility date formula
  • Does not bear the risk of portfolio performance or market movements
  • Receives stable retirement income
  • Usually faces a vesting period and faces a restricted withdrawal of funds
  • There is an adverse effect on diversification because both job and pension are linked to employer health
  • Employee is subject to early termination risk if employee is terminated prior to retirement
  • The employer is responsible for managing the plan assets to meet pension liabilities
  • The employer thus takes investment risk
  • Benefits are determined by stated criteria usually associated with years of service and salary at retirement
  • Pension benefits are a liability
  • Regulated by ERISA and state governments

In a defined contribution plan:

  • The employee bears all the investment risk
  • Legally owns all personal contributions, and owns all sponsor contributions once vested
  • DC plan lowers taxable income
  • Employee must make all investment decisions for his/her retirement
  • Employee must decide on asset allocation and risk tolerance
  • There is restricted withdrawal of funds
  • Employee owns plans assets and can move assets to other plans
  • The employer must offer employees a sufficient variety of investment vehicles
  • The only financial liability is making contributions to the employee account
  • Has lower liquidity requirements
  • Has fewer regulations to deal with, but is usually required to have an IPS that addresses how plan will help employees meet objectives and constraints
  • Defined contribution plans also come in 2 forms, participant-directed and sponsor-directed (profit sharing)
  • In a profit sharing plan, the employer decides the investments

A plan is considered qualified in the U.S. if it meets federal and state tax laws for retirement funds.

Defined benefit plan objectives include:

  • Returns: To have pension assets generate returns sufficient to cover liabilities
  • Return requirement depends on funded status and contributions based on accrued benefits
  • Also determined by future pension contributions: return levels can be calculated to eliminate the need for contributions to plan assets, contribution minimization goal more realistic
  • Pension income should be recognized in the income statement
  • Plan Surplus: Indicates cushion provided by plan assets to meet liabilities
  • Greater the surplus, greater ability to take risk
  • Underfunded means decreased ability to take risk
  • Risk: Common risk exposure measured by correlation between firm’s operating characteristics and pension asset returns
  • Lower the correlation, higher the risk tolerance
  • Higher the correlation, lower the risk tolerance
  • Financial Condition: Can be measured by debt-to-asset or other leverage ratios (debt-to-cap, debt-to-EBITDA), using sponsor’s balance sheet
  • Lower debt ratios imply better ability to tolerate risk
  • Higher debt ratios imply lower ability to tolerate risk
  • Profitability: Can be represented by current or pro former financials
  • Workforce: Age of the workforce and ratio of active to retired lives is a strong indicator of performance
  • Usually the younger the workforce, the greater the ratio of active to retired, increased ability to tolerate risk
  • When older, lower rate of active to retired and higher risk
  • Plan Features: Some offer option of either retiring early or receiving lump-sum payments instead of a retirement annuity

Defined benefit plan constraints include:

  • Liquidity: Pension plans receives contributions and payments to beneficiaries…any outflow represents liquidity constraint.
  • Liquidity is affected by the number of retired lives; greater the #, the more liquidity is needed
  • The amount of sponsor contributions; smaller the contributions, the greater the liquidity need
  • Plan features; early retirement features would increase liquidity need
  • Time horizon: mainly determined by whether the plan is a going concern and workforce age and ratio of active to retired lives
  • Legal & regulatory: ERISA, the Employee Retirement Income Security Act regulates defined benefit plans, above state and local pension law
  • Pension fund assets should be invested for the sole benefit of the participant, not the sponsor
  • Pension funds have to exercise diligence before alternative asset classes can be added to asset base
  • Pension plans may prohibit investment in traditional asset choices like investments in defense industry, firms that produce alcoholic beverages, or firms that have a reputation for being destructive to environment