Ref: 10-003 of 24 Jan, 2010            PDF Download from ScribD or Download Pool Sidebar>>Articles

Dear Readers,

The correction has started precisely on the date we mentioned – 21^st January, 2010. We predicted it more than a month ago.  Now, the situation has taken turn for the worse.  The trigger was provided by President Obama’s proposed clamp down on the banks proposing far reaching regulatory actions to rein in the banks in terms of their size and activities. A separate article will appear within a few days titled – OBAMA WAR with INTERNAL TERRORISTS

Dow has lost over 5% in 3 days. S&P has dropped to 1093, slightly above critical level of 1083. I do not care for technical indicators. My forte is fundamentals. The core fundamentals are worsening.

• Bernanke’s extension as Fed chief, once considered almost a done deal, is now in serious doubt.  If he is reconfirmed, there may be a short reprieve for the market.
• The future of Treasury Secretary Timothy Geithner is also in doubt.  The AIG dossier is becoming murky. The testimony of Paulson with Geithner in relation to AIG affairs is due on Wednesday, 27^th January, 2010.  It means that the Senators know something ignominious more than the investors are aware of.
• There are indications that the Senators have finally realized the extent of damage done by Henry Paulson of Goldman Sachs and Ben Bernanke from Fed.
  • President Obama’s pathani demand  “We want our money back” alludes that the $306 billions non fund based guarantee given for Citigroup’s worthless debt at behest of  Paulson – Bernanke combine are maturing into real fund based liabilities.
  • Read with massive profit of Goldman Sachs, and Citigroup’s insistence to cancel out the “loss sharing agreement with the Fed/Treasury”, the Senators and the President Obama appear to have realized the “foul play” and “Criminal conspiracy” against the State. Many frauds may come to light. It could have massive effect on Wall Street. Even Warren Buffet could become controversial. His days are beginning to have “U” turn for long.
• Two days – Saturday and Sunday, have passed since the President Obama disclosed his plan to rein in the banks, their size and their disapproved activities. The era of $25 billions of profit for the bank is gone for ever.
  • The earnings of almost all banks will be downgraded by the Analysts up to 30% to 80% that could collapse the prices of major money center banks. The entire banking structure globally will be re-assessed on severe downside. Bank of America, JP Morgan Chase, and Wells Fargo could face the burn of third degree.
  • There will be further lending squeeze from these banks raising real market interest rates.
  • If these banks can not make double digit billions of dollars of profit for next 5 years, , they will never be able to recover the past losses.  Nor will they be able to raise new capital due to poor earning prospects.  Fed/Treasury window will be shut for good.
  • In short, some major banks could become officially insolvent.
  • Goldman Sachs and Morgan Stanley may surrender banking license to avoid above restrictions.
  • The global banking giants operating in US such as Barclays, Deutsche Bank, UBS and Credit Suisse may have to realign their business. UK and Europe too could adopt similar measures with similar effects. UK and Europe always play monkey game.
• SEC is preparing for some tough times ahead. Bloomberg reports on 23/Jan that “Concern that short-sellers accelerate stock declines may prompt the Securities and Exchange Commission to adopt a rule next month aimed at curbing bearish bets when equities are plunging.”  It adds that “The regulation would require the trades be executed above the best existing bid in the market when shares fall 10 percent in a day,” In short, alarm is on.

Massive collapse is about to set in from Monday onwards.  It is scary.  It was inevitable; we were merely waiting for the trigger. President Obama provided it. He is not to blame for what he proposes. It is the way he has presented them and timing thereof. He is under extreme pressure to perform that is telling on him for his expediency.

• The markets may lose anywhere from 5% to 15% in short time (< 1 month), and 15% to 50% in medium term (< 4 months) if the short term correction takes place.
• Margin calls will exacerbate the downside.
• Mutual Fund redemptions could cause massive slides.
• Money could become scarce overnight. Overnight Call rates could zoom and stay there for unduly long time forcing short term rates to rise. My previous article “Maturity Mismatch’ may become reality as projected.
• Monday could be the beginning of Tsunami wave, category 7. So many things could happen swiftly in short time.
• Massive losses to investors will become a hard reality.  What they lose this time may not be recoverable in next 3 to 7 years.
• The only reprieve will come when the Bernanke is allowed to continue his job. While he has lost all credibility and should not be confirmed, it is in the interest of the market that he continues for a while (temporary extension) until his successor is chosen. If he loses the job, one may be waiting for him at Goldman Sachs.

This time, protecting capital is more important than the earnings. If you have capital left, there would be earnings one day.  It is not necessary to make money in every trade every day. It is enough if you made good money some time rather than a little money every time. We therefore suggest the following from Monday onwards.

There could be huge meltdown. All markets may go down Minimum 3 to 7 days continuously in varying degree.

US Market:

1. Dow may lose another 14% (1400 to 1500 points) and then rest before going down again.
2. If S&P goes below 1083, it will be bad sign for technical analysts. In my view that it will be breached.
3. NASDAQ may outperform DOW.
4. Buy Put options on S&P 100 known as OEX-100 and Nikkei 225. These are very volatile.
5. Do not trade S&P 500, it is less liquid and does not move fast.
6. SELL short or Buy puts on ADRs of Wipro (trading at 43% premium) and ICICI Bank (-3%) and HDFC Bank (+15% premium). The heavy premium is usually lost in meltdown. Further, one can keep short position in US market on any equity or ADRs for about 12 months by paying suitable margin. Check with your US broker first.
7. Think of accumulating undervalued stocks like MTNL with Zero debt where discount will rise due to meltdown making it attractive. Stronger rupee tend to add more value in $ terms.
8. Indian ADRs could develop more discount than shown today, making them more attractive.  Some counters are better bought as ADRs than underlying equities in India. If you have choice between domestic share and ADR, prefer ADR of liquid counters. (large cap stocks)
9. A strong buy opportunity may emerge in FCCB (Foreign Currency Convertible Bonds) of Indian companies that may be hammered in meltdown. Their yields may rise, premium contracts or even trade at discount. They being denominated in $, stronger rupee will give better return than underlying shares in India. Watch out for them. Go only for well known battered counters in info tech, pharmaceuticals and telecom sector. This is for only wealthy investors having $ 1 Million or more investment budget. Not suitable for local investors due to larger size lot involved

10.  There could be political and social upheavals. Since hundreds of billions of dollars are at stake, and jobs being lost with increasing intensity, violent political removal at high level at many places is likely. This time for a change, the war will be within United States. Law may take a back seat.

Indian Markets:

Indian growth story could be dented but will remain intact than China. India is still safest place to invest. With US, Europe, UK, Japan and even China taking massive blow, India, Indian economy and even Indian Rupee (if made convertible) could become real alternative to US dollar.

Nevertheless, holed in the habit of taking cue from the Dow and Asian markets, SENSEX may tumble by 14% in a few days (2400 points). Huge margin calls from Wednesday onward could push it down further by another 1000 points. The market may reach 13,400 first, rebound for 800 pts in dead cat bounce rally, followed by sharp drop down further by 2000 points. In short, the market may lose 4600 points within one month. Even if the market recovers during intraday, it may close down near the close. Not many would want to keep their position open overnight.

However, there is a caveat. Indian budget due in February could provide relief or act as mild buffer against further sharp fall. It all depends how Government of India responds. The interest rates may be lowered, not raised to contain inflation, and Income Taxes could be lowered for Corporate and Individuals that may provide fillip to the Indian markets. This is however conjectural. Rely more on facts than rumors or opinion. Financial expediency will prevail over political one.

1. Stock financing banks like ICICI, HDFC, Axis Bank, SBI could tumble more due to proposed changes in banking law in United States.  They will not be able to carry out their investment banking activities as before. They could be the index draggers. Do not touch them for another 1 month even with remote pole. Swap them into neutral stocks like IDBI Bank or IFCI who are domestic oriented.
2. Stay on short side.
   1. If you do not want to sell down your portfolio, insure it by buying Out of Money Put option of NIFTY for February or March, if available.  Do not speculate, use it as hedge. The markets could have wild swings that could boost or bust the speculators.
   2. SELL 50% of remaining stocks held. You may have already sold 70% by now from the peak, if you have followed this column. What you may have is remaining 20% exposure.
   3. Possible exceptions are recovery play like Spice Jet. Ispat Industries and Dish TV who have returned to profits already or will return in one quarter.
   4. Finish your selling through out the day, taking advantage of intraday recovery. Even if the Asian markets recover during the day, continue selling. You may sell some Spice jet too if you are sitting on good profit, with a view to buying back later.
   5. Stocks like ITC and Hindustan Lever may perform better than others.
   6. SELL or reduce Mutual Funds (except LIC linked) by 70% and retain cash.
3. Focus on buying only after 3 days of fall only the following stocks. (1) Spice jet (<56)  (2) Ispat Industries (<23), (3) Dish TV (<41) , (4) Petronet (<71), and (5) Evinex (<3.65), (6) IOC (<270), (7)IFCI (<43), (8) UCOBank (<48), (9) LIC Housing Finance
   1. Avoid Oils, Metals, Ores, Infrastructures and all other high PE stocks. Also avoid story stocks like PSU on privatization list.
   2. Avoid oil producers; prefer State Owned Refineries like IOC, HPCL, BPCL, MRPL etc. Avoid private refiners like Essar Oil and Reliance.
4. Buy more of Gold, Gold ETF and Silver.
   1. Some may say that if Gold falls below $1065, there could be a meltdown. Do not buy those stories.  Gold rise most in uncertainty.
   2. Silver is generally stronger than Gold nowadays. Use major fall in their prices as strong buy opportunity.
   3. No targets are given because you will be in hit and run market for several days.
5. Please note that this article is meant for regular delivery based investors. Some hedging operations are mentioned to protect their portfolio.
6. Short term investors active in F&O segment may conduct their activities on their own impulse. This article is not meant for them.
7. When the markets correct as above, it will provide strong platform to build Long Term Portfolio of any amount as suitable to investors. Investments made in steep correction time will provide better return than properties.
8. Defer buying property for investment purpose until March 2010.
9. If you are keen on investing into property for investment purpose, not for self use, better look out for commercial properties from March/April. Read my all articles on “How to invest series….” again.

10.  Buy equities only when you strongly feel like selling gold or silver. At that time, one may buy equity or properties. Prefer “Ready to Possess” properties than properties under constructions from unknown developers who might close their shops suddenly and run away. This time around, avoid farm properties, and prefer commercial or residential properties in major metro cities or towns having population over 30 lakhs (3 Millions; +/- 20%)

Will the markets go the way as projected? I will be happy if I am proved wrong. The trouble is that I am often proved right than wrong. But do not take me for granted. Try to be rational and make your own calculated guess and decision.  There is not going to be time for analysis.

A question may arise, whether this crisis was solvable?  The answer is yes. For every problem there are multiple solutions. My father taught me once “For every problem, there are 10 solutions – just go out and find it”.  I therefore wrote the book “SUB PRIME RESOLVED” which provided comprehensive solutions. If US-A does not go the way I have suggested, the nation is set for gloom, doom and total collapse. It may not exist in present political form.

I also made several attempts to offer solutions to the US Administration as under. However, there was no response. No regrets. I did my job and would let them do theirs.

First, when I offered solutions to President Bush in August 2008 before crisis began.  However, he or his stooges in White House ignored.  My letter to President Bush is already in the repository and read by the readers. The real trouble started precisely three weeks later in September 2008.

Second, I offered similar solutions to Senator Obama while he was campaigning for Presidency.  There was no response. But I can understand that.

Third, when my book “SUB PRIME RESOLVED” was published in June 2009. I wrote to President Obama, the First Lady Michelle Obama and Vice President Joe Biden. No response either.

Fourth, when I wrote similar letter to ex-President Bill Clinton and Jimmy Carter;  they too did not care to respond.

Fifth, when I sent my book “SUB PRIME RESOLVED” to Sen. McCain, and Bobby Jindal, Governor of Louisiana and Chris Dodd, Chairman of Senate Banking Committee.  However I did not receive any reply or courtesy acknowledgement.

Sixth, when I wrote a letter to the President Obama very recently with similar letter copied to Vice President Joe Biden, Senator Christopher Dodd, Chairman of Senate Banking Committee, and Timothy Geithner, the incumbent Treasury Secretary. Again there was no reply or acknowledgement.

I threw a challenge to President Obama that if my solutions could not extract the United States from the severest financial crisis and make it healthy again within 9 months, I repeat 9 months, he can sign “Death Warrant” against me with my and my family’s full written consent.

Seventh, when I wrote to the Chair of FDIC (Federal Deposit Insurance Corporation). Again there was no reply or acknowledgement.

I wonder why we send our children to USA for higher education such as MBA when those expensive institutions do not even teach basics of Courtesy, Management and Administration to upcoming business and political leaders in United States itself. They keep their minds closed and ask us to keep ours open.

The Americans are suffering from “Superiority Complex”.  The past successes have gone to their head. They appear to feel that only they know everything, forgetting that the knowledge knows no bounds. It can spread anywhere. We are in internet age, America’s  own invention.

The White House may be thinking that this Kalidas, Anil Selarka or whoever he is, must be a crazy, egoistic, pseudo bastard.  When our Nobel Laureate economists, financial gurus and management experts in United States are not able to think of one solution, how on earth this Kalidas could have multiple solutions from Hong Kong 5000 miles away? Throw him into the dustbin for good.

There is one way Americans can come out of troubles learning from Americans only if they prefer.  Hand over the country to IBM executives. They know how to think, conceive, design, plan, implement, execute and bring positive result. They think out of the blue box. It was IBM who invented “Personal Computer”. Many years ago, the company was in shamble spending billions of dollars in advertisements.

However, they read the writing on the wall in time and did not take long to “dump” it by shifting to services and software solutions. There used to be IBM logo everywhere in the past.  The striped blue logo is rarely seen anywhere now; and yet, they are everywhere like God.  Look at them today – they are fast, nimble, profitable and as efficient as any coveted American enterprise ought to be.

President Obama has to take three decisions.

1. Dump GDP theory. (the way IBM dumped and got out of PC business)
2. Dump Goldman Sachs and quarantine every Goldman emission in Fed and Treasury (and everything should be fine in US and globally)
3. Pump Gold. (bringing back monetary stability by re-standardizing dollar)

Kalidas (Anil Selarka) Ref: 10-003 of 24 January, 2010 (Sunday)
Hong Kong

Personal Blog:     http://anilselarka.com
Book Web       :     http://www.subprimeresolved.com

Disclaimer:
Readers, before you proceed:
This article is released on Sunday so that you have enough time to deliberate on information available from various sources. This is for your informational purpose only. Consult your professional broker, banker or investment adviser before acting or taking any decision. No liability of any kind attaches  to the author.



Ref: 10-003 of 19-Jan-2010 by Kalidas PDF Download from ScribD

READ or watch any media report in Uncle Sam’s America – newspaper, magazine, Business channels on TV or any interview of senior executives of large corporate. They talk about only Top Line and Bottom Line. Top-bottom, top-bottom, top-bottom……… they go on lecturing for hours using above words in different contexts. In the process, the body, the substance, is lost.

What happens when a person with blood group A+ is on operating table and is in need of blood. Will any other group of blood be acceptable? Of course not. He will die if he is injected with different blood group.

Same thing applies in the field of finance and economy. Those of you who has read my book “Sub Prime Resolved” and the primer series “How to Invest into anything…” would have known that “Long term assets should be financed by long term liability which could be in the form of capital such as Equity or Preference shares and long term borrowings from banks, financial institutions, public issues in the form of Term Loans, Bonds, Debentures or perpetual instrument.

Thus, if you grant a loan on 10 year basis, it should be financed by either equity or 10 year long term borrowings. The borrowings have to necessarily match the maturity profiles of the financed assets. If a bank or Mortgage financing institution is granting a fixed rate mortgage on 30 years basis, he should have capital or borrowing on matching terms and maturity, those who finance the long term assets with short term liabilities are bound to fail sooner or later.

This is what is going to happen in America. The banks and mortgage institutions, with a view to boosting stock prices of their company, lent mortgages at incredibly low rates, often not exceeding 3 or 4%, and financed them from short term borrowings from Fed under Federal funds rate program or in discount windows at near zero rates. In reality, they were arbitraging between short term borrowings and long term lending rates.

THIS WAS SUICIDAL

Let us take a concrete example:
Suppose Banker A grants $ 250,000 Fixed Rate Mortgage loan @4% repayable in 30 years. The rates are fixed, without recourse (unique in America) and without escalation clause. See the stupidity of the American banker. How could they take the view of Interest rate for 30 years? How could they lend on such incredibly low rates for 30 years?

LENDER IN HEAVEN
He does not have enough capital. He borrows short term (monthly rollover or Libor based) either from Fed or inter-bank market. He pays at the most 0.25% and lends at 4% netting interest differential of 3.75% or $ 3,750 per $100,000 per borrower per year. It is his net profit with least maintenance cost. The stock price goes up, his stock options become more valuable asset and he also earns fat bonus at year-end running into millions of dollars. That is his performance. His colleagues and neighbors consider him as “Smart Ass”

LENDER IN HELL
Now, what happens when the interest rates rise? Well, until the rates rise by 2% to 3%, his profit margin merely narrows down. Instead of earning arbitrage interest differential of 3.75%, he would earn 1.5 to 2% or $ 1500 to $ 2000 per $100,000 per borrower per year.

However, when the short term interest rate rises to 3.5%, and above, he will have to visit Wash Room often. He is losing in every case. Being a fixed rate mortgage, he cannot pass on extra cost to his borrower. If he tries to under other Alt-mortgages, the borrower will come to him, hand over the key and say, sir, enjoy your property. He becomes “lender in possession” with no recourse to the borrower. In short, the banker is now in duress.

If interest goes to say 8%, he will have shell out 4% from his own pocket or $ 4000 per $ 100K mortgage per borrower per year. If he has granted $ 300 billions of such loans, he would lose 4% or about $ 12 billions from his bottom line. NOW, his bottom line becomes bottom less pit.

There are about $5.5 trillions of mortgage loans in United States. In the event of massive rise in interest rates, the banks would be losing $ 220 billions for rise in interest cost by 4%. In other words, the lenders would lose @ 55 billions for every rise in interest rate by 1%. If the rates rise to say 24% as it happened in early 80s, the bankers and mortgage lenders will lose over $ 2 trillions ($ 2000 billions) per year.

We are not counting derivatives that run nearly 6 to 20 times the above amount.

There will be catastrophe. The borrowers will not be affected because they have fixed rate mortgage. But when his lender gets bankrupt and gets sold to some third party, what happens if the said third party annuls the agreement on the ground of equity (it is possible legally) and fair play?

At the moment, thanks to four musketeers – Hank Paulson, former Treasury Secretary from Goldman Sachs, Timothy Geithner, incumbent Treasury Secretary, Ben Bernanke, incumbent Fed Chief and Alan Greenspan, former Fed chief for over 18 years. They are the “Destroyers of America”

The rates are about to rise. China has already expressed intention not to buy any more T-Bills that has infuriated the United States. A vicious propaganda is launched to the effect that China bubble is about to burst. They are trying to squeeze Chinese nose so that their mouth and purse open up.

But then, they do not know the Chinese.

When the rates begin to rise, all the banks and mortgage lenders will come under severe squeeze. The double “dhol” (an Indian musical drum) with Bernanke on one side and Geithner on the other, will make such noise that the markets would be rattled to the extreme.

Several banks will fail, in thousands. Several trillions will be lost again. The Fed will find difficult to print more and more $ notes. FDIC will be busy taking over banks day in day out with no funds in the kitty.

President Obama with no cash in the kitty, printing press closed, no majority in Senate to pass mischievous Health Care bills, will be pushed to the wall. His popularity will go down below 30 from 46 at the moment.
Hell will break lose again in the financial market. Will it happen and so early. It all depends at what speed the rates rises. It is not the question of “whether” but “when”

Ride the rally in the stocks and bonds for the time being. A financial earthquake, more severe than Haiti, is in the waiting. I could hear the simmering sound, I could smell the faint smokes, what I do not know is the precise time when this volcano and earthquake will burst and with what intensity.

Kalidas (Anil Selarka)
Hong Kong, 19th January, 2010 Ref: 10-003

Personal Blog: http://anilselarka.com
Book Web : http://www.subprimeresolved.com

Ref: 09-036A of 25-Dec-2009 (Merry Christmas Day) Final update on 3 Jan, 2010
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Steven Spielberg is considered one of the most gifted and visionary director in the world. He could not only visualize but also gave concrete shapes to the characters that became life size symbols later. Unfortunately, he never handled a political, financial or economic theme for simple reason that he could not visualize the complexities of current financial crisis engulfing his own nation – United States of America.

President Obama, one of the rarest breed of gifted speakers, has turned into a con man. He is a successful diversionist not revisionist lawyer, Senator or President but to borrow the phrase from Jim Carrey’s dictionary – Liar and Liar.

I thought the uneducated Indians in the villages or woo doo tribes in sub-terrain landscape in African continent were the only bunch of superstitious religious zealots. Never before I thought that the educated mass of Americans could rival them in the practice of superstitions. If the Hindus, Muslims and Africans could follow their religious leaders blindly, the Americans too follow their political leaders with same zest and vigor. They also believe blindly or superstitiously that their King or President could do no wrong. They do not realize that USA is following a pattern of USSR and its days are now numbered

A good leader should be a good orator, but a good orator need not be a good leader. Sen. Obama, a distinguished orator, won his presidency not because of his strength but due to the weakness of GOP – or Republican Party badly bruised by erstwhile President George W Bush. He could use his oratory skills to whip up the anti-GOP sentiment to win the democratic nomination defeating the Hillary Clinton and then defeating John McCain to win the Presidency. In short, he won due to the default of the other.

Yes, he inherited the bad legacy of burning nation from the President Bush. Nothing new. Almost every President inherits some or the other bad legacy from predecessor. Even President Bush inherited the regime of artificial low interest rate from President Clinton, Rupert Rubin (then Treasury Secretary) and Alan Greenspan (Fed Chairman for 18 years by now) that sow the seeds of the massive derivative contagion.

President Obama forgot that he was appointed President for 4 years – up to January 2013 latest. Having seen his inadequacy to address the immediate financial problems, he set upon himself a convenient mode to divert the attention of the American people by any means. He adopted the following diversionary tactics successfully:

1. He started showing moon to the American people. Having seen the oil prices zooming to $ 145 per gallon, he found convenient tool to exhort the American car manufacturers to “go green” and invest into green technology that would reduce oil consumption, pollution and carbon emission.
   1. Such cars to be commissioned by 2014 to 2016 when he will no longer be around.
   2. What is the point of talking such non-sense when the immediate need was to set the financial house in order, stop the mortgage hemorrhaging, foreclosures and create the jobs and help the local Auto manufacturers to dispose off the existing car inventory in the ware house and on assembly lines?
2. He then became champion of another green technology – Solar Energy – which will take years and billions of dollars before that technology became available at reasonable cost on mass scale. Again, he was showing moon to the American people by showing distant calendar of 2016 to 2020.
3. He became then the champion of “climate change” by spearheading campaign for actions for control of carbon emission and reserving and doling out hundreds of billions of dollars of unproven and non-focused technology or even concept.
   1. He was trying to interfere in the automatic self balancing system of the nature.
   2. He went all the way to Copenhagen in “freezing cold” to talk about “global warming”. Back home in all 4 North Eastern states from Washington DC and New York were engulfed in 5 to 8 feet deep snow or ice in freezing cold when he was devoting almost half the time of his presidency on global warming.
   3. Hey, Mr. President, there is snow and ice all around – where is the evidence of global warming?
   4. In Afghanistan and Iraq his US army was exploding disastrous bombs that were emitting more Carbon dioxide than one small plant in China. Did he end the war with immediate effect
   5. Osama and Al Qaida were blasting human and real bombs everywhere killing thousand of innocents and causing tons of carbon smokes from the bombing sites. Could he get the cooperation of Bin Laden for carbon emission control?
   6. In short, he was rushing into “abstract” and “non verifiable” concepts just to divert the attention of the American people.
4. He planned and created hundreds of billions of package called “TARP Trillions” to resurrect the financial system.
   1. He was trying to kill the wealthy and efficient by chasing them all the way down to UBS, Switzerland by calling for names of 52,000 wealthy Americans who were reported to be tax dodgers.
   2. He was using hundreds of billions of new money thrown after bad money by lending support to bankrupt Citigroup, AIG, Fannie/Freddie Mae, Bank of America, Wells Fargo, Goldman Sachs, General Electric and host of other bad borrowers.
   3. In short he was trying to extract billions from efficient wealthy and passing on nearly 100 times more to inefficient banks, brokers and insurers.
5. When he could not create jobs, he invented new slogans – by equaling Saving of Jobs as Creation of New jobs.
6. When he found his plans were no longer working, he invented a new weapon. “Health Care Reform” which at the moment of this writing has almost become a law, spending over $ 1.3 trillions extra.
   1. Here again, he was showing moon again. He said that 33 millions of Americans would be insured immediately by taxing healthy Americans to pay for health insurance they no longer wanted.
   2. In short, he was hurting efficient wealth earners and healthy Americans. He did not like “efficiency” in earning income or wealth and building health.
   3. If you earn more, pay more to the state. If you are healthy, pay the tax or compulsory insurance or pay the fine ranging from $ 750 per person to $ 3000 per family of four. In other words, he became a “blood sucker” draining out the blood or pompous health from the healthy Americans.
   4. He showed the moon again by showing distant calendar. He said that American people will save $ 1.3 trillions over 10 years. Hey, Mr. President, you are elected to do job to have immediate benefit during your Presidency – that is – for 4 years lasting up to January 2013. Why do you indulge into actions that go beyond 10 years when you will no longer be around?
7. He started chasing fat bonuses to Wall Street bankers which would affect at the most $ 5 to 10 billions. But he embarked upon a journey to guarantee the worthless debt of $ 306 billions of Citigroup. $ 306 billions amount to entire Corporate America’s tax collection for full fiscal year. Was Citigroup as single big entity that important to demand the resources of entire corporate world of America?
8. He was clamoring about the deepest financial crisis over last 70 years. Hello President. Have you seen the Dow Jones index on this Christmas Eve? It is at 10,554. During the 1987 crash, the Dow dropped to less than 3000 which is about 22 years ago. If the financial crisis is of epic proportion, worst in 70 years, how come Dow Jones is still trading at 10,554 ( Up 7554 points or up by 251%?) Does it mean that the Dow is artificially supported at higher level by printing more and more money and giving to affiliated banks, brokers and funds to support the market by “artificial respiration”?
9. It is evident that President Obama has been using his oratory skills to divert the attention of the American people from core issues. He ignores the hard realities and pushing up the abstract subjects which can not be verified or justified by proper rational.

In short, the entire country of United States has gone to the dogs. There are no care takers. The educated Americans have become docile and weakened mass who are loathe to seeing the hard realities.

They bother more about tiny Afghanistan than 3 time’s larger states at home. What is Afghanistan? No one heard its name in last 50 years until George Bush went into those rugged mountains to search the rats nicknamed Al Qaida. Afghanistan is a non entity – just piss it off. And get out of it in one week. When Afghans do not care about themselves, why should Americans or other NATO forces do? It is none of their business to be out there anyway.

In short the ordinary Americans have been blinded by their loyalty to their political leaders or Presidents, Senators and Congressmen. They are equally superstitious as the mumbo jumbo Africans, religious Muslim populace loyal to white or black robed Mullahs or Ayatollahs or ignorant Hindus in villages loyal to the saffron robed politicians or priests.

The situation in the country is worsening in almost every sphere. The economy is still sliding, jobs are being lost, interest rates are convulsing with upward bias, frustrations among the populace is growing, town hall meetings are getting restive, the TV media finally gave the thumbs down and started talking against the administration, the deficits are bulging into trillions, the foreclosures are now expanding canvas to high end properties, commercial properties are sinking further,

Freddie & Fannie Mae need no more bail outs but need blank checks from the government.

The Citigroup is still oozing purple blood with additional hundreds of billions getting sour, no one wants to take the helm of Bank of America and the Fed is devising new ways of raising rates by resorting to Term Deposit lending, instead of normal Fed Fund and Discount windows. AIG is still basking under microwave heat and wilting further and further. Financial frauds are coming to light with greater intensity.

The troubled banks are getting deeper and deeper in the mud. The FDIC is running out of funds, and almost all states find their finances stretched beyond sustenance. Nevertheless, the Fed and Treasury go on printing and also guaranteeing hundreds of billions of dollars as if there is no tomorrow.

Even new IPO are being withdrawn at increasing ferocity. A leading company like National Beef, a profitable company employing thousands, was unable to raise just $ 250 millions from the market, whereas bankrupt banks have been reported to be raising over hundreds of billions within 2 days.

Are derivatives dead? I do not think so – the Fed and Treasury appear to have been using derivatives with increasing ferocity through JP Morgan Chase and HSBC to short the gold/silver and buying $ index to retain the foreigner’s interest in the country. Attempts are now being made to weaken the United Kingdom by arranging downgrade, so that the Asian reserves do not get diverted to British Pound. Further, British pound is having less weightage ( %), so the risk in physical delivery is relatively less than Euro ($ Index Weight %)

The above summaries are derived from the detailed analysis of the following specific developments in every sector/company.

1. 1. Citigroup:

Ever since losing billions of dollars in Latin American countries around 1992, this bank with Chase (now JP Morgan Chase) has been refining its balance sheets by using exotic derivatives in US and mostly offshore centers. It really has no core business. It is one of the larges assets shufflers in the world. Its balance sheet size, about $ 92 billions in 1992 – pre take over of Travelers group, has grown 22 times to $ 2.1 trillions before current meltdown, that is over 100% per year for 17 years. Unbelievable!

1. The official lending was $ 45 billions in TARP funds; its worthless bonds were guaranteed $306 billions by US administration under great Hank Paulson (ex- Goldman Sachs) and Ben Bernanke, making it investment grade AAA securities overnight. That could be the main reason for Goldman Sachs massive surge in profits. They probably knew earlier what was to come.
2. US-A (= US Administration) reported that Citi paid back $ 25 billions of TARP money. Did Citi have cash to repay? No, so how did they pay back? They converted $25 billions of TARP Debt into equity shares. That is, they repaid by book entry – one pocket to another.
3. US-A further reported that Citi would pay back $ 20 billions from new capital raised. How did they raise the capital in such worse financial scenario? The identities of new investors were not known who paid such humongous sum, who are those idiots or White Knights willing to invest billions into this bankrupt bank? Why their names are not disclosed when they have taken substantial stake into this group. This is mandatory disclosure.
4. Even Abu Dhabi Investment Fund (Sovereign funds) served notice on Citigroup to cancel their financial arrangement or refund them damages of over $ 4 billions.
5. A New York Times article recently said that the bank’s “moves will result in a $10.1 billion hit to Citigroup’s fourth-quarter results… (Source: American Banking News)
6. So, the Citi is losing in billions and has no public profile to raise $ 20 billions. Why does it want to repay the TARP billions even on paper? Because they want to avoid answering Senate and need permission to pay millions of dollars of pay packages. In India, there is a popular saying – Behti ganga me haath dho lo – that is rechristen yourself by taking a dip in flowing holy Ganges even if it is dirty and polluted.
7. There are further reports that Citi has sold almost all saleable business. Its only remaining subsidiary is reported to have billions of dollars of worthless assets.
8. 2. AIG
   1. Steel bleeding to death. No one now knows its true liability or assets. Even after consuming $ 200 billions of state funds, this Insurer could not insure itself from other losses. It needs re-insurer in the form of Fed and Treasury. Geithner is very kind to this institution.
9. 3. Bank of America
   1. It is reported on last day of 2009 that the bank is expected to report massive loan losses in 2010 stemming from its aggressive lending in credit cards, mortgages and other business lines. At one point, BofA was offering credit lines of up to $100,000 to startups backed by nothing more than the entrepreneur’s signature. And mortgage requests turned down by the bank as too risky during the credit bubble were eagerly made by Countrywide Financial Corp., which BofA acquired in 2008.
   2. It is reported to have repaid $45 billions of TARP money. What is the source? It is making that much money? No one knows. Who financed them? No one knows.
   3. No one wants to become CEO of this company. Finally, they found one from inside the company.
   4. A recent move by John McCain in the Senate on line similar to Glass Steagall Act in the past will force BofA to sell off Merrill Lynch. No one really knows what is happening in the boardroom of such banks. One day they acquire, use up hundreds of billions of dollars under TARP or some other names, and then in less than 12 months, they will be sold off. What happens to state aids? – “Confuse if you can not convince anyone.”

1. 4. Fannie Mae/Freddie Mae:
   1. They are acutely distressed. They are not beneficiary of direct state guarantees, but it seems that they are. Between them, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Considering about 20% to 27% default rates, the bad loans may be running into $ 1.1 trillions.
   2. These two companies have already received over $ 110 billions of state aid so far. Call it TARP or otherwise. Instead of approaching Senates for bail out time and again, the Treasury on Thursday gave a blank check to these institutions to sidestep the Senate authority required for bail out. The upper cap of $ 400 billions is now removed. In other words, they can borrow even $ 1 trillion without approaching Senate or Congress. (That makes both stocks good buy. They will never be in trouble).

In other words, the Senate or Congress no longer counts. The President Obama, Ben Bernanke and Timothy Geithner (last two are bureaucrat not appointed by the American people). In short, in world’s largest democracy, two appointed bureaucrat, NOT elected representatives (100 Senators or 500 Congressmen) will rule America and the World Financial System. The whole world will be hostage to this trio – one elected, two appointed.

The other banks like Wells Fargo, JP Morgan Chase, General Electric, General Motors and Airlines are so vulnerable the economy and entire financial system in the United States is pushed down several fathoms deep. The derivatives in Forex trades, oil, gas and precious metals like gold and silver is bulging at alarming rate.

And yet, Dow and Nasdaq are rising to record value. They talk about recession almost comparable to 1930 or 79 years ago, but the Dow is still trading at 10,500+ , about 7500 points higher than in 1987 when the massive crash took place 22 years ago. Free money is ruling the entire world today. Here is something interesting I could pluck out from the internet (these are not my views)

The level of risk the U.S. government is taking on with many of the FHA loans is insane. The U.S. government is taking miniscule down-payments on these mortgages, over 90% of the time less then 4% down payment is out down and with the other hand the U.S government is handing out an $8,000 check, paid for by the U.S taxpayers.

The net effect is that for virtually every new mortgage which these government entities are initiating of $250,000 or less there is zero (net) down-payment. Given that a large majority of current sales in the U.S. are below this level, this means that most of the home-buyers in the U.S. this year are putting up zero down-payments.

The Federal Reserve also allows the banks to “borrow” money at 0%. The banks then “deposit” this money with the Federal Reserve as a “savings account” for which they collect interest, while paying no interest on the “loan”. In other words the Federal Reserve is simply giving the banks free money. But the money doesn’t actually sit there; the Fed uses that money to buy U.S. mortgage bonds to keep the U.S. mortgage rates artificially lower

We are therefore heading towards massive fall. We have never been so close to the death than anytime before. This time around the pain will be much severe than 1930 because the stakes and money supply is almost 50 to 100 times higher. The Gold and Silver derivatives will explode soon. Fannie/Freddie Mae will outperform due to unlimited guarantee from the state.

Would USA Collapse on its own default?  Shouldn’t the World rush to its defense?

The current indications are that US will fail on its own. Its supremacy in practically every field is seriously challenged and will be at stake. Some nations are happy to see the United States fall due to its years of military adventurism, hegemony and arrogance. Its shattered economy will have delayed effects all around the world. After years of supremacy, US is at the receiving end today.

There is a saying that those who are unbeatable abroad are finally defeated on their own turf by their own people. The next war will begin in US itself when the disappointed people try to vent their anger against US administration for not being able to create enough jobs or turn around the economy.

The efforts by US-A so far are totally in wrong direction. If they read my book “Sub Prime Resolved” they will know how to address each problem with convincing solutions. The present problem in USA is lack of demand, not supply. Instead of promoting $ value by paper trading in dollar index, the US-A has to gear up the efforts to jack up physical demand everywhere. That is what makes money and creates jobs.

Should the world remain silent spectator and let the United States flatten before everyone’s eye? I do not think so.

I often hear from many quarters in Asia that “they (Americans) deserve it (collapsing economy and virtual defeat in Iraq and Afghanistan).” May be the actions of recent Presidents were egoistic and smacked of arrogance. But that should not take away all the credits and good will built since the World War II. The whole world became prosperous and democratic only because of United States of America aided actively by Britain.

It was US who saved us from the clutches of Hitler and the tyranny of Japanese imperialism. It was the single biggest contribution to the world. It was again US who saved the world from Communists and Authoritarian regime all around the world, gave the world the computers, internet, free trade, and new inventions. It was US who espoused the cause of democracy everywhere. The surfeit of knowledge that the world finds today owe its origin to United States. We have to be thankful and equally grateful to this wonderful nation. The Knowledge has migrated across the world from the soil of United States.

It is therefore payback time. However, US-A lead by Obama have to be receptive to the newly emerging wealthy countries in Asia. One can not clap with a single hand, says an old adage. When two hands come together, then only we get the sweet sound of clapping.

Instead of encouraging manipulation in the value of dollar by paper trading, US should ask the sovereign funds to invest into US property markets and import wealthy businessmen who can create jobs for the Americans.  To buy the property in USA, they have to necessarily buy the dollar which may enforce real demand. My book “Sub Prime Resolved” precisely addresses to these core issues which continues to be ignored by US-A. Let us hope that the wiser counsel prevails from the beginning of Year 2010.

Kalidas (Anil Selarka)
Hong Kong, 25 Dec, 2009 – Final update on 3 Jan, 2010

Blog: http://www.anilselarka.com
Book Web: http://www.subprimeresolved.com

Ref: 09-038A of 14.Dec.2009 Author: Anil Selarka (Kalidas)

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Some countries do anything to get their aim achieved. They go to any length. The difficulty with the militarily powerful country like United States is that they abuse their power, become arrogant and destroy rest of the world with self centered policies. They also conceal their real intention as if they are fighting a strategic war.

There is absolutely no doubt that United States is in extremely tight corner financially, politically on home front and militarily in Afghanistan and Iraq. Its major concern on Foreign Exchange front is severe pressure on dollar. At the moment, it is trying to keep the interest rate low by printing its way out. The question is – How long? Sooner or later, it will have to come to the market for borrowing trillions of dollars so printed during last 16 months.

If China and Japan do not buy the Treasury bonds or notes, the rates will shoot up to glaring heights, placing enormous pressure on housing market. The recent visit of President Obama and Timothy Geithner (Treasury Secretary) was not for climate change or green technology. Both China and Japan have served them feelers that they will not longer be buying T Notes or Bonds in USD due to extremely high risk of devaluation and extremely low yield. This is why both President and Treasury Secretary have visited those creditor countries to pacify them. Otherwise, what Treasury Secretary has to do with carbon emission or climate change? He is facing worst climate back home.

So, instead of convincing the other countries, notably China and Japan, it is trying another strategy used during Asian Crisis. Rating and Mating game. Instead of telling China or Japan to buy US$, it will force downgrades of strategic and vulnerable countries, and indirectly telling the major Forex owners not to buy their currencies, in fact sell them. If they sell those currencies, what would they buy? One is selling something against something. Here it is US dollar. In other words, by causing downgrades of those countries below investment grade, the major creditor countries will be indirectly persuaded to buy US dollar even if it is not desirable, almost bankrupt, yields almost nothing and yet it will be made the only alternative.

For instance, Greece considered one of the tiniest and yet corrupts country where one can influence the government policies by controlling the pockets of finance ministers and other cabinet ministers. After Iceland, it was Dubai, now Greece, Spain and United Kingdom. Further, the dollar is pushed up in paper trades – by causing some affiliated or TARP recipient banks to buy the $ Index which is set up against 6 currencies – Euro, GBP, Can $, Aus$, Yen and Swedish Kroner. (I still do not understand why SKR is there in the index. There are bigger currencies like RMB, INR, and South African Rand, which represent nearly 60% of world economies.

The rating agencies like Standard and Poor and Moody would never downgrade US corporations so easily. In spite of US incurring huge trillion dollars of deficits, its status will be retained at AAA level. Why not? US has incurred debt in its own currency US$ – if there is demand, it will simply print out the dollars and hand over to the countries creditors. No country in the world has incurred default on debt denominated in its own domestic currency, because they can print their way out.

If any non-US country incurs more debt into its own currency, these rating agencies act in collusion and threaten to downgrade that country. As recently as now, India, who holds almost $300 billions of Forex reserve, bought 200 tons of gold from IMF, recorded no banking or financial problems, having fastest economic growth of 7.9% and healthy property sector, was threatened with the downgrade even below investment grade due to rising budget deficits.

How about Japan which has highest level of national debt – almost 170% of its GDP – could still be rated Investment grade AA+? Only because Japan is appeasing United States by buying US treasury on demand.

Of late the relations between Britain and USA are not that cordial. Britain is nursing the feeling that it was wrongly goaded into war. It also feels that the present banking problems at home are mainly due to United States. It is almost certain, despite pronouncement to the contrary, that Britain and United States are drifting apart. This is why UK is sought to be downgraded by the US based rating agencies like S&P and Moody’s.

The message is “if you do not meet out political objectives, we will downgrade you and force you bear higher interest cost and devalue your currencies.” Your weakness is my strength – is what they convey.

If the people sell dollars, they buy gold as last resort or buy other English speaking countries currencies like British Pound. Instead of losing “reserve currency” status to either Euro or GBP, US is indirectly influencing rating agencies to downgrade UK so that people do not buy GBP, in fact sell it, instead of holding on to it. The history shows that only two currencies in the world – GBP and US$ – have played alternate role of global reserve currency.

There is a precedent too. During Asian crisis, every thing was pushed down – currencies, bonds, equities, properties and even Gold (because Asians have affinity for gold). The only currency rising was US$. If you cause fire, close down all doors and windows except one window – that is US$ – the people will rush into that window.

Look at the full list of Countries’ rated by S&P. Almost all countries almost bankrupt running into with giant losses in trillions of dollars are listed AAA or AA, the highest investment grade. The dollar block countries who have their currencies tied to US$, are also rated AA+ because they are loyal to USA.

1. The creditor country like China is rated just A+ in spite of having $2.3 trillions in Forex reserve. Can you believe that? US with giant black hole of $ 2 trillions is still rated AAA and China fully dressed up with $ 2.3 trillions of surplus parked in Forex, is rated 5 notch below to A+.
2. India is rated at BBB- , slightly above investment grade, in spite of having 7.9% growth in GDP and $300 billions of Forex reserve.
3. Russian Federation is rated BBB+ in spite of having huge Forex and Gold Reserve.
4. South Africa is also rated lower at A+.
5. Almost all commodity countries (except Canada and Australia) are rated lower investment grades. The western countries want cheaper commodities, They rate these countries downwards, so that their Interest cost goes higher, capital markets go lower, and as result currencies go lower to make their buying of commodities cheaper in USD terms.

Almost all funds and pension funds have in charter a provision not to invest into below investment grade countries. The moment country like India is downgraded below investment grade; there will be huge sell off by funds that will bring down Indian Rupee and also entire capital market. The interest rates are also forced up as consequence.

GDP is also understated in respect of commodity countries. For instance, in India 50Million tons of potato will be valued at Rs 4 per pound or just 10 Cents per pound. The same potato will be valued in USA at $ 2 per pound or nearly 20 times intrinsic value. The US GDP looks better and India’s much smaller. Then, these rating agencies use grossly understated GDP numbers to compare with their budget or trade deficits. Obviously, they will look taller, because base is very small compared to western countries.

It is high time the developing countries understand this “Rating and Mating” game and take actions to protect themselves – one of them will be to impose blanket ban for 5 to 15 years on those mischievous rating agencies. Once they are kicked out while playing dirty war games, they will be put on notice not to cause troubles in those fast developing countries. The world will be a better place to live in.

Kalidas (Anil Selarka)

Hong Kong, Ref: 09-038A of 2009.12.10

Blog: http://anilselarka.com

Book Web: http://www.subprimeresolved.com