Financial Wisdom – By Kalidas

Radical Solution for Credit Crisis from Kalidas

Retiring President’s Parting Gift to Paulson

with 16 comments

Buy Rotten Eggs for $700 Billion in 36 days


The first mistake the Americans made 8 years ago was when they forgot to get the incoming President’s head examined. There is always an intense debate for the suitability of any candidate for the coveted post of the President. More emphasis is always given how the next Commander-In-Chief would act in case of exigencies. No one asked them of their basic knowledge of economics except how much taxes would he reduce.

 

Visit any Forex traders or option trader’s website – they give you $ 1 million to play a demo game. Never before any presidential candidate was asked to play such demo game in public debate. Never before any presidential candidate was asked what will you buy if you were given $700 billion of Taxpayer’s money?

 

However, on the historic Sunday, 28th September 2008 to be precise, a bipartisan agreement was arrived at to authorize the President Bush to succumb to the wishes of the Treasury Secretary Hank Paulson to spend $700 Billions of tax payers’ money to buy rotten eggs lying in the vaults of Banks and Brokers in his last 36 days!

 

When a person is dying, his last wishes are asked for by the relatives circling on him just to listen how much he would get if that fellow dies. When a criminal is condemned to death, his last wishes are asked for before his head is shaven off in preparation for his journey to the death. Hank Paulson did not have to have his head shaven off. His wish was $700 Billions – and America’s most retarded President in the history granted the wish to spend $700 Billion in 36 days! He was joined by the chorus of congressmen/women to tell their Commander in Chief – Yes Sir. The President said – I did not hear you! The congressmen raised their pitch – Yes Sir, Yes Sir, Yes Sir.

 

Ask any businessmen or any person of ordinary prudence – would he give his departing employee even $700,000 of authority when he has already resigned and counting his last 30 notice days? Of course No, then how come the President of United States hands over blank checkbook to his Treasury Secretary with unchecked power of $700 billion when he is counting his last 36 days?. If something goes wrong later – Mr. Paulson would say” I have right to remain silent.” Look at the bill you have passed in the Congress. – No questions to be asked. Period.

 

Only a few months ago, the President Bush with great fanfare distributed Tax Rebate checks to American citizens amounting to $106 billions only to withdraw $ 700 billions from their and their future generations’ pocket on today (28 Sept 08) like a conman. During his presidency, over 4000 soldiers lost lives in Iraq, 1000 more in Afghanistan, over a million innocent people died in Iraq, Twin towers of World Trade Centers were destroyed, billions of dollars of budget surplus was converted into whopping deficits, US Dollar dropped by 40%, hurricanes destroyed several cities, wildfires raged in and tons of mud sided in California,  millions lost jobs and homes, oil prices rose from low 30s to high 145, and industries collapsed one by one – from Auto, airlines, healthcare, Medicare, insurance, brokers, investment banks, and banks for only one reason. He was thoroughly incompetent.

 

Now, let us consign all events until today’s night into history, and focus what will or could happen from now on to the financial markets around the world. Here are the posers and possibilities.

 

 

 

 

Q:

Is it a done deal? Will it become a law?

A:

Preliminary agreement is struck. While leaders have agreed, it is not known whether the rank and file senators will vote for the bill. They have been getting angry response from their constituencies to vote against, There have been street protests in California, Anger is building up which may become violent. US is heading towards unrest and then civil war in a few months.

Q:

What will happen to the market?

A:

Paulson wanted to get the bill signed by the President before the world market opens tomorrow. He expects the market to give solid response. However, the market is always an unpredictable beast. World markets do not act on themselves. They wait until the US market opens. Further, the market movement depends on the major brokers. As you are aware, most of the leading Investment banks like Bears Stearns, Lehman Brothers and Merrill Lynch are either in the coffin or ICU. The credit crunch is so much that most of the brokers do not have money to pump into the market and take their proprietary position.

 

However, Goldman Sach and Morgan Stanley, now being banks, will be given billions of dollars to buy into overseas markets, especially near day close, if the markets do not move up strongly in the morning trades.

Q:

Will the bank start lending and reduce the liquidity freeze?

A:

Doubtful. Most banks from Citibank to UBS have raised capital from the market in the form of High coupon (9% to 11%) preference shares in billions of dollars. They will be forced to retire high cost debt, leaving little in their coffer.

 

Further, more and more debts are being generated in the market due to sub prime default that makes more and more derivatives doubtful. The banks will be forced to pay to the counterparty in respect of future obligations. It can not plead that it does not have money. The creditors may sue the banks to either pay or file bankruptcy. There is no chapter 11 for banks, only Chapter 7 and 13 that compulsorily winds up the company.

 

The mistrust has been built into the market so much that the counterparty risk has risen to the highest level. Under these circumstances, the interbank transactions will remain low. The collapsing banks in USA, UK, and rumors of failures in centers like Hong Kong, will continue to make the market difficult for lending.

 

Corporate lending may take a while. The commercial paper market has become like a junk bond market with interest rates running in high single digit to low double digits even for blue chip customers. The real interest rates are perking up.

Q:

What happens to the Equity markets?

A:

They will open high but then retrace after 2 hours, again peaking up near the close due to US funds buying with billions of dollars in blank checks.

 

The real rally may come only after the reaction of the US market. Tuesday may be stronger than Monday, provided no negative news emerges on deal front.

Q:

How  the markets may react?

A:

  • Dollar block country may do best – Hong Kong, Singapore, Taiwan, Korea may choke 3% to 5% gain initially, go down by 3% in correction, to peak up gain near close by another 3% to close at 8% maximum.
  • Japan may gain by 3% to 5%.
  • Sensex may gain 600 points initially, depending on how the Asian markets have reacted, to lose 300 pts, to make up morning losses as soon as London market opens strongly. If London is lower, due to another bank failure, the Sensex may lose steam. US brokers may not be that active in India market. They need more money at home than park them overseas.
  • Dow Jones may chalk up over 400 pts gain because of massive short covering of Index weighted financial shares. If the bill is passed into law on following day in the congress, then all financials will rally.
    • It is possible that the Banks and Brokers may start reporting profits due to write back of excess provisions caused by higher market value manipulations.
    • If in the meanwhile Mark to Market rule is abolished, the bonds may be re valued to par value on HTM or Hold Till Maturity principle. (In this case, ICICI Bank may also benefit in India)
    • Some large hedge funds may fold up due to changing of rule of short selling of shares in the middle of a game. The losses may run into billions of dollars. If they save the banks, the hedge funds get busted. Will Paulson plan save them too?
    • There could be thousand of law suits in UK and USA against authorities from hedge funds, pension funds for losing money due to sudden changing of short selling rules in middle of the game.
  • Bond market may behave differently, Initial rally may fizzle out. The collapse of banking system has just started. British banks, once considered safe may come into more problems. The bank failures are spreading to every where. From USA to across Atlantic – UK, Germany, Belgium (Benelux countries), Hong Kong and more will follow in Asia and Japan. Many have not shown yet where do they stand. Almost all Asian and Japanese banks are saddled with the American CDO, CDS, and Lehman Bonds that run into billions. When Lehman owed over $600 billions, the question arises – to whom? Those who are trying to buy Lehman because by buying them out, the cross entries will be eliminated.
  • The British banks like HSBC may have more losses. If you look at their balance sheets in Yahoo, there are hundreds of billions or even trillions of dollars of transfer between various assets –
    • long term assets were reduced by 800 billions and short term liabilities rose by $1.2 trillions, ($1200 Billions)
    • Long term Investments rose by $ 1 trillions.($1000 Billions)
    • Cash resources depleted by $300 billions.
    • Its capital is just $88 billions against total liabilities of $2.2 trillions or just 3%.
    • In other words, all off balance sheet assets and liabilities of off shore centers have been brought into the main balance sheets. How much of such trillions of dollars is good, we do not know.  See the following link…  http://finance.yahoo.com/q/bs?s=hbc&annual
    • In short the balance sheet severely deteriorated. This applies to almost all banks who have tied up with USA and who bought US banks or brokers 3 to 5 years ago amid lots of fanfare.
  • The dollar index may gain initially.
  • Commodity price may see fall. Metal stocks may fall worldwide again.
  • Gold too may fall initially by 6% to 8% in 2 or 3 sessions. However, the gold is having lot of real strength. After initial euphoria, it may rise again.
  • Oil Prices may fall due to shorting of futures against buying of $ index. The oil prices are bearing the stamp of Rupert Rubin, ex-Goldman Sach Vice President and former Treasury Secretary and now top executive of Citigroup. With blank checkbook in the hands of Paulson, some billions may be given to old colleague to short the oil and strengthen the dollars
    • It may be noted that recent spike in oil price by $25 in single day was due to short covering of oil contracts ahead of settlement on Nynex. Under the current rules, the settlement is subject to physical delivery. So the short sellers have to either buy back the contracts or deliver millions of barrels of oil physically that they do not have.
    • This scenario may be repeated in November. While buying back the September contracts at huge premium, they shorted the November contracts again in roll over exercise. If the oil prices remain strong, expect another major spike in oil prices in November. Oil is now most manipulated market with the use of derivatives.
    • There are all signs that another Enron is in the making, this time, 20 times larger. Which company is used now, is not known.
  • Interest Rates will go much higher and you should not be surprised, if they get into high double digits in less than 6 months. The lower credit rating of US governments by Fitch and others in oveseas countries (Moodys and S&P will not change their loyalty) may again push up the rates.  If the rates does go to even 12%, the US government will have to service their debt of over $13 trillions @ $ 1.5 trillion per year of repeat expenses.

Q:

Does it mean that USA is on recovery path?

A:

Absolutely not. The manipulative effect does not last longer, especially when the trillion dollar scale is considered. The States and Local government who need over $200 billions to manage their state, may raise their ugly head and demand payment when 3 times more money is given to bankrupt banks. USA is receding into civic unrest and Civil war slowly and surely.

Q:

Is there severe discontent among Americans at the current Bail Out plans

A:

Americans are damn angry. They are losing jobs, homes, healthcare, Medicare every thing… They have now converging on the streets with big banners. If the bill is passed into law, they will flare up, and the anger will spread across the nation like a Californian wild fire. Since guns are freely licensed in USA, there is likely to be mayhem and the ordinary civic unrest will escalate into full scale Civil War. They have to ban gun immediately before situation worsens.

 

This may happen swiftly, even before election. We should be very happy that it does not happen; In fact it should not happen or should not be allowed to happen. For the first time, US Administration will have to use bullets on their own soil to kill the American themselves instead of killing millions of peoples abroad in self engineered war of massive scale.

Q:

What should an Investor do now?

A:

This is pet line of CNBC in its advertisement for which they never reply. The present scenario is very unstable, and changes from moment to moment. It is more akin to war. Deal with it as it comes. No planning is going to work, except holding some portion in gold.

Q:

Is there any solution to the present mess?

A:

Of course, yes. The trouble right now is that no one knows what has suddenly happened and why so swiftly. Watch for my book “Sub Prime Resolved”: that contains complete solution and also wait for my next article here – How we got here? Legalizing Parallel Economy”

Q:

Are we to worry about every thing?

A:

No. The problem will take care of itself. For every problem, there are 10 solutions, One has to find it. I have found them, and sent out a letter to appropriate authorities who received them by FEDEX on 25th August, 2008, but they did not reply. Who is by the way Kalidas? Never heard of him.

Kalidas, Hong Kong
29/9/2008

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Written by anilselarka

September 29, 2008 at 1:32 pm

16 Responses

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  1. The irony of this saga, however, is the one final truth that Washington and Wall Street have yet to face:

    The financial crisis will continue and will deepen one way or the other. At this late date, there’s nothing they can do to prevent it.

    Whether Congress succeeds in passing legislation this weekend or not … whether the package is strong or weak … whether Monday’s market brings euphoria or panic …

    No one can set back the clock ten years. No one can reverse the debt bubbles already created. No can undo the structural damage already done. The bad debts, like the truth, must come out.

    Washington’s entire argument is flawed at the core. They insist that the disease — the debt crisis — is so severe that we risk a total meltdown and a great depression.

    But in the same breath, they argue that their cure — despite all past bailout failures and despite very nasty side effects — is somehow going to prevent the consequences.

    This leaves you with no choice. You cannot wait to see how long Wall Street’s celebration will last or how soon Washington’s plan will fail. You must take protective action now.

    Take advantage of any stock market rally to get out of all stocks .

    Take advantage of any temporary reprieve in the housing collapse to sell all the real estate you don’t want to live in.

    Move your money to cash, and stash that cash in the safest, most liquid investment in the world today: a money market fund that invests almost exclusively in U.S. Treasury securities or equivalent.The yield is low. But that’s the price smart investors are paying for safety today, and it’s worth every penny. It’s better than the best bank.

    Martin

    September 29, 2008 at 4:29 pm

  2. Ohhh Kalidas-ji,
    what an explanation… this is what i call “explanation with a BASE facts”.

    Do keep posting so that poor souls like me will learn some new things….

    Regards
    Prakash

    Prakash

    September 29, 2008 at 5:36 pm

  3. Sir

    Your articles are wonderful. It is very good guide for persons like me. Your articles always contain more facts and figures.

    Continue your guide. Guide us in this mess

    Regards
    R.Yuvaraj

    R. Yuvaraj

    September 29, 2008 at 7:48 pm

  4. Dear kalidasji,
    Bingley goes bust another one predicted by you bites the dust.
    regards,
    amarawargaonkar.

    amarawargaonkar

    September 29, 2008 at 8:26 pm

  5. Kalidas ji

    Once again, you provide us valuable insights in such simple understandable terms.

    Indian markets are already showing what you have predicted. Even your closely watched stocks like air deccan and spice jet etc have gone down below the levels at which one would love to buy 9deccan today went as low as 52.35 approx!)

    Pls keep us all enlightened by your knowledge.

    Rajesh

    Kalidas Reply: (I am using this method for first time)
    You are right. I bought Air Deccan at about 53 or about(previous purchase was near 65 and 71) and also bought Spicejet again at about 18.75. Both these stocks were sold at much higher price of over 280 and near 90s respectively. What I invested was my earlier profit. Capital is already out.

    I believe that American citizens’s common sense ultimately won over the Wall Street experts’ intelligence. To me rejection of vote is a market positive event. It saves the taxpayers from disasters. Nothing is going to happen like Paulson had predicted. His actions were more directed to save Goldman Sach. If he had entrusted even $500 billions to Goldman for management, they would have earned a fee of minimum $ 5 billion to $10 billion maximum. He was to appoint some guy (I forgot the name – it starts with F) from Goldman.

    Rajeshhimself

    September 29, 2008 at 9:02 pm

  6. Hi Kalidasji.

    As alwyz the best article once again. Its so sweet and simple that a novice can understand it too. And u hv made us financial experts which will be treasured life long…

    Thnx a lot for sharing ur words of wisdom.

    I have CALL and PUT options of NIFTY to handle sudden positive upmove or breakdown. Am I right in doing this? Plz suggest…

    Thanks,
    Ojal Suthar

    Ojal Suthar

    September 30, 2008 at 12:16 am

  7. Dear Sir,

    Another great article. your writings gives very delight to every reader of your article.
    Have one question which form of gold is advisable ETF or physical form. Please adivise us

    Thank you

    Best regards,
    Rajmohan

    M.Rajmohan babu

    September 30, 2008 at 1:57 am

  8. Physical gold is always better than paper gold like ETF in overseas centers are like Hong Kong where the banks have been infested with hundreds of derivatives. No one knows the status of broker or bank where the paper gold is being kept.

    India is a different ball game. Physical gold is difficult to trade. The banks only sell the gold, never buys back, so it is not so liquid. Further, banks like HDFC charge almost 10% premium to local prices. If you buy physical from gold merchant, there is no guarantee of its quality, though they do contain some marks. In Hong Kong, we have protection on the quality, and all gold dealers by law are required to imprint the purity and weight on the gold bar or coin like “lagdi”

    An ETF fund like Quantum Gold Fund, which imitates phycial gold, appear a better choice. I used to own this fund a couple of times. As per charter, they are supposed to invest only in physical gold and not in derivatives. If they can mainatain that, they are safe. However, what is the guarantee of the funds holders if the managers make a wrong move and start buying derivatives? The reputation of this fund is high and there is no premium to the spot price of the gold. It is therefore good substitute to physical gold in India only, where I find no other problems similar to world over.

    Further, this ETF can be kept in Demat form which is Government of India sponsored depository. So even if the broker goes under, your holding is safe. Please check with your broker that it can be kept in Demat form (I did not check it, though I bought it 3 times in the past and sold them later at profit)

    anilselarka

    September 30, 2008 at 2:56 am

  9. for Ojal Suthar

    Calls and Puts (if bought only) are limited liability hedging strategy, if used with stocks held. Otherwise, they are speculative with limited downside. If one writes covered call, it is again conservative approach, quite safe. If one writes put to receive the premium, without buying out of money put, then it exposes investor to more risk.

    If you get good premium in writing puts, and there is little premium in out of money put, it is better to do both to earn slightly less but limit downside. If you want to have more upside at the same time, you may buy additionally out of money call to enhance the return.

    In India, the option market is not so good. The strike period and price are not long enough. I therefore normally do not advise on such options or futures trades. Out of money calls and puts are also highly illiquid. I therefore do not participate or advise and investor on strategy.

    In USA, the market is very sophisticated. You can have even long term calls and puts extending up to 3 years. One can also take small or large position according to his capacity. In India, each call and put represent certain minimum lot, that makes India a highly speculative market alone.

    anilselarka

    September 30, 2008 at 3:11 am

  10. A very stimulating article. Curious to know what will happen next now that the house rejected the $700 billion bailout?

    Sukaina

    September 30, 2008 at 3:56 am

  11. Dear Sir,

    Thank you very much for the reply. It is very much appreciate how much you care your readers. Sir once again thanks lots for the reply. It is a very much information for us to invest in gold

    Best regards,
    Rajmohan babu

    Rajmohan babu

    September 30, 2008 at 3:57 am

  12. Hello
    Kalidas Sir,
    i suppose you are still there ,sir the bailout plan hasnt gone through and the US markets have toppled down, ur prediction came true eitherwise. just wanted to know whats next , will there be chaos in the indian market this morning.
    i had bought some IFCI’s thinking that the market will rally , but i think there will be downtrend , all i wanted to know is can i sell off all my holding and short few of them , and is there any suggestion from you
    please reply sir ,
    manju

    Manjunath

    September 30, 2008 at 4:12 am

  13. for Sukaina, Manjunath

    Please see my new post summarizing today’s events. For your position of IFCI, I also bought some at about 32/33 level today. To me, today’s rejection of Bail Out package was extremely good event and it displayed the American Citizens’ maturity over so called Wall Street’s expert intelligence that brought down the whole market.

    On one hand, there was a bail out package for $700 billions of which only $250 billions were disbursable immediately for which bill was put up before congress for its Authority. Whereas FED at the same time distributed and pumped in $673 billions into the money market to ease the liquidity – under whose authority? When you do not need authorization for $673 billions, why do you pretend seeking authorization for just $250 billions of bail out package?

    Read my article to avoid duplication and out of context reference.

    anilselarka

    September 30, 2008 at 4:51 am

  14. first of all thanks for your blog. I was your reader at your older place too, now it has just become more convinient for us to read only yout thoughts. 🙂

    Thanks for writing so much, so nicely and so much to the point, with so much information ….

    -jetJeet

    Ajeet

    September 30, 2008 at 5:37 am

  15. Sir ,i couldnt search for that article if you could let us know this will be great.I am still in confusion as im not able to sense what needs to be done tommorow. this is a great risk i am taking as i was a small time investor. i have risked almost 4lakhs on ifci. i need your serious suggestion , whether to book loss or still wait for the market to appreciate. my average buy price is around RS 38. i just want an eye opener on this please

    Manjunath

    September 30, 2008 at 5:37 am

  16. Kalidasji,
    Regarding Physical gold saga…,

    Ramesh Damani said that not only Physical Gold, “goldbees on NSE” are also fine. What are “goldbees on NSE”? Are you aware of them. Can you analyze pros & cons of it for the benifit of all? Also if it is good, please let us know how to buy them.

    Regards
    BV.

    BV

    October 1, 2008 at 10:39 pm


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