Another Look Inside AIG

By Markham Lee on February 7, 2009 More Posts By Markham Lee Author's Website For the most part AIG’s (AIG: 1.04 +0.04 +4.00%) collapse has focused on the derivatives trades inside their Financial Products division, but it appears that their investment unit was a major culprit as well: From the WSJ: Accounts of AIG’s near collapse have largely focused on soured trades entered into by the company’s Financial Products division. But a close look at the 2,000-employee AIG Investments unit shows how this part of the conglomerate made gambles that helped cripple the firm. n running the securities-lending business, AIG Investments bought tens of billions of dollars in subprime-mortgage bonds. That turned out to be a riskier approach than some rivals’, who parked cash from securities lending mostly in low-risk or short-term investments such as Treasury securities and commercial paper, according to analysts. The idea behind securities lending is to take advantage of large numbers. Insurers like AIG accumulate large quantities of long-term corporate bonds and other securities, earmarked to pay claims down the road. They can goose that return by lending out the securities to banks and brokers in exchange for cash collateral. The insurers then invest that cash to squeeze out a bit more yield for themselves and the securities borrowers. They usually achieve this by parking the cash in other fixed-income investments, such as Treasury bonds or short-term corporate debt. The extra profits can be just hundredths of a percentage point. But when applied to tens of billions of dollars of securities, the returns can be significant. At one point, AIG Investments was putting about $70 billion into subprime-mortgage bonds and other higher-risk assets, said people familiar with the matter. These choices helped AIG squeeze an additional 0.2 percentage point in yield, or roughly $150 million in revenue. AIG’s spokeswoman said the firm “invested counterparty cash in highly liquid, floating rate, triple-A-rated” residential mortgage-backed securities. The approach backfired, exacerbating the liquidity crunch that forced the U.S. government’s initial $85 billion bailout of AIG in September. The losses didn’t stop then: Besides a $60 billion credit line to AIG, the Federal Reserve last December provided $19 billion to wall off losses purchased by AIG Investments’ securities-lending program. In all, the total rescue package now sits at $150 billion. Graphic Courtesy of the WSJ Isn’t it hard to not view CDOs (and other debt securities) as some sort of Ivy League scam? What else do you call it when you mix in a bunch of highly suspect mortgages in with a bunch of good ones, and call the whole thing “Triple A Rated”. Like I said before there are criminals in jail for running Ponzi schemes who are looking at some of the shenanigans on Wall St and wondering why they’re in jail, while the clowns who destroyed Wall St and crushed the American economy are running around free. Reading this article also makes me think that our entire financial system was being run on the assumption that nothing would ever go wrong, or that chances for things to go wrong was so small as to be all together irrelevant. I suppose it’s like leaving your door unlocked if you live in a safe and relatively crime free neighborhood, yes, chances are nothing will happen, but if some random meth head tries your door and finds it unlocked… You can read more here. Source: The WSJ: “An AIG Unit’s Quest to Juice Profit” — Serena NG, Liam Pleven, February 5, 2009

Beyond Positive Thinking

Investing WisdomBy Mario Cavolo on February 2, 2009 More Posts By Mario Cavolo Author's Website 


We begin with our confusion: Unemployment and job cuts are reaching historically high levels with 15,000 more job cuts announced yesterday after the historic Black Monday job cut meltdown. And so, what does the Dow Jones stock market index (^DJI: 8129.81 +51.45 +0.64%) do? It rallies 200 points!! 


For investors who don’t realize the importance of shorter term trends in all of the investment markets, it is daunting but there are key nuggets of knowledge which make it much clearer and they are vital before you begin investing. Of course I know people need inspiration and better communication skills to improve their lives. But as a professional speaker and motivator and coach, I am going to set those personal and business development areas aside in this article and help you focus on how to make money in the world of market investing. Facing hard times and big changes, we need answers. 


How can I make money? 
How should I invest? 
How can I position myself for the future? 
How am I going to face my retirement? 
How can I grow my assets while minimizing my risk?
Should I start my own business?
Should I invest in the markets?
What if I lose my money? 
How can I invest in oil or gold or stocks with minimum risk?


SOME ANSWERS Activity in the world’s markets appears to tell us that the “smart money” is out there, staying in the market, and thinking along these lines of thought:

1. Yes, the stock market, historically, could still go lower but at current levels it is not that high. It has already declined 50% from its 2008 high. Indeed it is true that intelligent money/investment magazines/websites like Fortune and Money and many other investing-related publications and websites are issuing countless articles listing many excellent stocks that can be purchased now at bargain levels. This statement is absolutely true and reasonable. So unless the world economy gets decidedly worse and starts melting like an ice-cream cone in the Arizona desert, then yes, stocks like Pfizer (PFE: 15.035 +0.155 +1.04%) at $15 and GE (GE: 11.50 +0.13 +1.14%) at $12 and Whole Foods (WFMI: 10.3284 +0.0784 +0.76%) at $12 and and Home Inns (HMIN: 8.09 -0.10 -1.22%) at $8 and Altria (MO: 16.91 -0.02 -0.12%) at $16 and McGraw Hill (MHP: 23.46 +0.15 +0.64%) at $23 and dozens of others are smart long-term business investments right now which millions of other shareholders paid over $50/share for last year. If you buy stocks in these well-analyzed companies at these price levels, you own a piece of these companies and you paid a nice low price. That makes you intelligent, not a gambler chasing market tops. I am not saying there is no further downside risk, but to buy low and sell high is the right way to invest and keeps your risk at the lowest possible level. So stop following the crowd which buys when everyone else is buying. That’s when prices are already too high.

2. What About All the Horrible News? The economic meltdown? Yes it is real and it is serious and we can thank the greed of the Wall Street banking industry. However, we could suggest that the “smart money” has already discounted the bad news, including the bad news which will be coming for the next six months. Earnings reports are terrible as expected. Layoffs are a big problem, orders for goods are way down, and the Baltic Dry Shipping Index indicator is historically low. By the way, that index shows us the level of shipping going on which tells us how active the world economy is. Makes sense, right? All these things point downward and confirm the banking crisis has acted as a catalyst propelling us into a very bad recession that was cyclically overdue. You need to realize that the market knows this already and the market, as usual, is anticipating the upturn and healing that will begin starting in about six months. Did you know that stock market prices usually lead the actual economic recovery by about six months? Call them optimists or call them greedy. They believe and are assuming that everything will start improving by mid to late 2009 and so therefore the market has bottomed now and so they are focused on the present day opportunities. They might be right or we may still see further declines, which by the way does seem quite likely. The swings of the market, argues George Soros are mostly emotional not logical, just short term thinking in the trading markets which leads us again to understand that if you’re trading in this market, you need to realize the short term nature of the market rallies and declines. This applies to stocks, oil, commodities and gold/silver. For example, within a wider trading range, the market will spend two weeks rallying up, then two weeks working its way back down for profit taking. These are called short to midterm rallies and should be ignored by long term investors and those with money they cannot afford to lose. Short term traders and midterm investors look more closely at moving averages and other technical indicators to identify where they should enter or exit a position, ie., buy or sell a particular stock or ETF which represents an index, sector or commodity such as gold or oil. 


3. Government Interventions Are Enough and Will Help. People in the market are praying for and assuming a positive result from government efforts; that the combination of worldwide bailout packages, economic stimulus packages, improvement in credit markets, lower priced oil and commodities and low interest rates will be the positive factors which will, in combination, prevail over the combination of negative factors. In addition, the professional trading and institutional money continues willing to assume some risk in the market rather than have their money just sitting in the bank earning next to nothing at close to zero interest. So the U.S. stock market, which is the worlwide leader and indicator, by showing any strength at all, is assuming that all the other incredibly bad news such as an unprecedented level of job cuts and company meltdowns will not ultimately drag us down too much further. Investors conclude the circumstances will most likely not get worse and drag us into a much more serious depression for the next 2-5 years. And so, they continue willing to invest in the stock market for lack of alternative places to put their cash. Real estate is not liquid. Banks offer tiny interest rates. Low interest rates are historically good for the economy and the stock markets. We just need to give it a few months to heal the evils that have occurred and the economy and markets will start to turn back up. This point of view is middle of the road and not so unreasonable. 


4. Inflation and the Money Supply. The market in the near term is currently ignoring the worries related to the dramatic increase in money supply with the U.S.government printing trillions in bailout and stimulus package dollars to support the economy. Starting with the trillions of the United States’s plus the trillions of other major countries, there will definitely be a price to pay later on in the form of inflation and pressure for currencies to fall. If this becomes a serious problem, then it’s called hyper-inflation. Even Warren Buffet acknowledged in his recent Nightly Business Report 30th Anniversary TV interview that the excess money supply is going to have to be addressed later. And so, you can see how the “smart money” is thinking on this point; it is not a current problem nor influence on the table today. Today we see and respond to what the market is doing, not what we think it ought to be doing. 


5. Buy Oil. Yes there is a short term glut of inventory which could last a few months, but the overall demand for oil worldwide (and basic commodities) is still increasing while supply is decreasing. Smart money analysis worldwide says oil should and needs to be trading in the $50 to $80/barrel range for a number of reasons and is currently at an oversold low price. See recommended strategies below. 


6. Sell Gold in the Short Term. It might break out from it’s recent upside rally, but other factors on that rise say it will go back down and continue to trade in its current range. Again, with inflation nowhere insight in the near term and the dollar holding in it’s range, gold is most likely going to bounce down again off its resistance level and trade in its current chart zone. Ditto for silver. 


7. Be a Renaissance Global Thinker. Look at the investment markets as a whole together and as a global whole, not just the “stock market”. The market is a much more interesting and diverse animal than just company stocks. The supply and demand for stocks, commodities, oil, gold/silver, currencies, and even shipping are all connected indicators and influences to one another. Even more so, they are now connected globally, which offers unprecedented opportunities to make money investing. Stop thinking narrowly like a citizen of your own country. You must consider the global worldwide impact of these developments and respond like a citizen of the world, not as an American or Brit or Chinese or German. For example, I recently read that the Singapore index (^STI: 1707.39 -4.53 -0.26%) fell through key support, the DOW Transports (^DJT: 3061.72 +37.11 +1.23%) are very close to breaking weaker, while the S&P500 (^GSPC: 848.21 +9.70 +1.16%) is not as weak. So, perhaps there’s a nice Singapore bear market trade. 


8. China. This country is going to continue its rise of global power and influence. Meanwhile, be extra careful about Chinese stocks. I am a successful entrepreneur, speaker and investor based in China since 1999. More so, I am surrounded by other smart, successful business people who have also been here in China and Asia doing business for just as long. We have all personally witnessed and are part of China’s amazing and scary economic and cultural development. We also know that the lack of financial transparency often leads to your money disappearing into thin air in wonderfully mysterious ways. Misappropriation of funds is rampant without scruples in Chinese business. Only play Chinese stocks that have already been thoroughly researched and are transparent such as: Home Inns, Petrochina, Hainan Air, China Mobile, and Ctrip. Otherwise, you are much more likely to be buying stocks in companies which are grossly misusing their funds. Because of the lack of transparency and style of doing business, you will never know it or you will know it too late. Better yet, just play the ETF’s that focus on China/Emerging Markets. (More on ETFs later)


Meanwhile, keep in mind a couple of other key points regarding China’s economy.
1)Yes it is greatly suffering in this economic downturn. Don’t believe otherwise.
2) In spite of #1, remember that even Chinese lower middle and middle class are relatively cash rich. They buy almost everything cash and have lots of it in the bank thanks to their thrifty habit of saving more than 30% of what they earn, more than any other country. So unlike Americans who are cash broke, the Chinese citizenry can survive a 2-3 economic downturn without as much relative misery to their personal lives. 
3) Besides the obvious impact on corporate business, the downside of the economic impact in China is that there are still somewhere around 800 million farmers and migrant workers who are going to suffer increased unemployment and there is a concern about related growing social unrest. 


 9. India is booming. There are not alot of ways to play the market there but relative to the world’s economies, their internal economic structure is much more solid and stable than even China’s. What To Do Now? So, what should you do to invest, to get smarter, to position yourself for the future? In the flat information world with Google at your fingertips you can become an intelligent, informed investor that does not make foolish investments and realizes that, for example, 30 year mortgages are a very bad idea. In the booming real estate market of China, there is no such thing as a 30 year mortgage. When I arranged a mortgage with Bank of China 4 years ago, I had to beg for a 15 year mortage because they only wanted to give me 10 years! You can quickly learn more online about every item mentioned in this article. ETFs The individual investor has opportunities to take positions in markets never before available without huge amounts of risk and capital because of the availability of ETFs and options on ETFs. They trade just like stocks and have tax advantages and much lower expenses compared to mutual funds. So: Research and Learn 


The following websites not only have financial and statistical information; they are packed with intelligent articles to quickly educate yourself about the world of investing and most everything mentioned in this article. www.cnnmoney.com www.motleyfool.com www.thestreet.com www.seekingalpha.com www.dailymarkets.com Even better, these sites have various free services that send news/alerts to your email box everyday. So first of all, plug yourself in, research and THINK. Do some research and then you’re ready to ask yourself basic, straightforward questions such as: 


1. Investing In Oil. Will oil stay at $30-$40/barrel? If you think not, then you can buy oil by buying share of the USO (USO: 29.10 +0.23 +0.80%) or DBE (DBE: 18.86 +0.10 +0.53%) oil ETFs. They trade like stocks and you don’t need to be in much more dangerous futures contracts. That’s kind of amazing if you think about it. You the individual investor with less money can buy oil just like the big guys and professional traders. 


 2. Investing In The Dollar Or Other Currencies. Did you decide the dollar will decline as many say? Do you believe it is going to decline, maybe even severely? Are you confident of that? Ok, then buy UDN (UDN: 25.0692 -0.2308 -0.91%). It is a U.S.$ currency ETF ($25 per share) which seeks to track the price and yield of the Deutsche Bank Short US Dollars Futures Index. Which means simply; if the dollar goes down, it goes up and you make money.  


3. Gold Play. You think gold will breakout above its recent rally and still go up? You can buy DGL (DGL: 33.03 +0.28 +0.85%), now trading around $33. If gold goes up, you make money. Or do you conclude gold will go back down from its recent highs and stay down for awhile? Buy DGZ (DGZ: 25.03 -0.25 -0.99%), now trading around $25. If gold goes down $1, you make $1. For example, gold recently peaked, but with no inflation and as long as the dollar stays strong in the next few months, there’s no reason for gold to breakout to the upside. If that’s the strategy you research and agree with for yourself, expect a price correction in the next few weeks. The trading range is $750 to $900 and gold has recently had a swing to the upside with next resistance in the mid 900’s. Same for silver strategies. You can position yourself long in silver with SVL (SVL: 0.00 N/A N/A). If you think silver is going down instead of up, then buy ZSL (ZSL: 13.40 -0.34 -2.47%) which is an ETF whose shares go up when silver goes down. That’s all you need to know. 


MAKE MONEY WHETHER THE MARKETS GO UP OR DOWN 
Because of ETFs, you can make money in both directions of the markets with the same risk levels as regular stocks and mutual funds. I like to say you are taking intelligent, active investment risks, same as you would investing in any new business or project. You are weighing the factors, analyzing knowledge, statistics and trends and then taking intelligent risks with your money, using stop loss orders to minimize your risk. That’s what investors do.  


4. U.S. and Global Stocks: Big Bargain Priced Defensive Stocks. Shares in these companies will go back up in price as usual when the market rises again. From the Fortune Top 40 list of stocks, there’s Johnson & Johnson (JNJ: 58.89 +0.31 +0.53%), Proctor & Gamble (PG: 53.96 +0.05 +0.09%), Walgreens (WAG: 27.61 -0.14 -0.50%), 3M (MMM: 52.27 +0.63 +1.22%), Pfizer, Carlisle (CSL: 18.87 +0.21 +1.13%), Philips, Unilever (UL: 21.83 -0.64 -2.85%), Vodafone (VOD: 19.80 -0.11 -0.55%), just to name a few. By the way, the last three stocks named plus Diageo are not U.S. stocks, so you’re actually investing globally. And stocks like GE give you global investment exposure too. These are stocks that have already been deeply researched and are recommended without bias by respected research sources including Fortune, Money, MSNBC and others. To that degree, you can genuinely relax. For example, while some risk concern exists about GE, you can buy it around $12/share now and the company is committed to maintaining the current 8% dividend unless more economic trouble forces them to cut it. That’s an opportunity in the eyes of many investors as an amazing longterm investment. 


5. Smokers & Drinkers. Did you know that when times are bad, smokers smoke more and drinkers drink more? Buy the big tobacco stock Altria (MO). The stock is a bargain at $16/share and it pays dividend over 7%. Or you could buy Diageo (DEO) which, by the way is a UK corporation, one of the world’s largest liquor companies. 


6. Health Care. With the aging of the world’s population, health care stocks are considered a safe, smart play and most of them are holding billions of dolars in cash. For example, Pfizer (PFE) recently had over 25 billion dollars in CASH and was trading at only $16/share. They just confirmed to buy Wyeth in a $68 billion dollar deal. You can own shares in Pfizer for only $15 and get a 4% dividend too. Or you can simply buy IXJ (IXJ: 43.965 -0.175 -0.40%), which is a healthcare/pharmaceutical industry ETF that holds Johnson & Johnson, Merck (MRK: 30.13 -0.11 -0.36%), Pfizer, Abbott Labs (ABT: 56.945 -0.035 -0.06%) amongst its holdings. Again, prices in this sector are at historically excellent values so invest in the future of healthcare instead of just paying through the nose for your medical insurance and expenses. 


7. Low Priced Consumer Goods and Fast Foods. In economic downturns, people buy less luxury and shop at Walmart more. Its simple to understand that! Stocks like Walmart (WMT: 47.42 -0.39 -0.82%), Kraft (KFT: 26.11 -2.63 -9.15%), YUM (YUM: 28.23 -0.04 -0.14%), Dollar General stay stronger during recessions. McDonalds (MCD: 58.74 -0.14 -0.24%) too. Cramer likes Walmart. Check them out. 


8. Conservative Risk With A Twist: Buy Longer Term Call & Put Options Instead of the Stock. Are you confident about the direction of a stock or index but don’t want to put up as much capital? Then consider conservative Call and Put Options. Think of it as a coupon for a $10 meal at a restaurant which expires a couple of months later. Options are similar. For example, if you think Microsoft (MSFT: 18.70 +0.20 +1.08%) is going up, then instead of investing $1800 to buy 100 shares of Microsoft at today’s price of $18/share, you can spend $210 today to buy a July call option at $20. So you know control the 100 shares of Microsoft. You are risking only $210, but you receive the gain or loss as the price of the 100 shares moves in the money. So if by May, Microsoft is priced at $23, your gain will be over $300. 


In Conclusion As Warren Buffet recently said during his Nightly Business Report interview, you would go to the store to buy things when they are on sale, not when the price is going up, right? It is important to position yourself for the future, for the longterm, not just think short term. Yes, there may be more downside risk because the bear market is not over. It may last three more months or even much longer. As of now, the global economy needs the American economy to lead the global recovery and the American stock market will typically anticipate the economic recovery by six months or so. There is even the possibility that the situation could become much much worse. But today, with intelligent research, one can find reasonable, smart opportunities to invest for the future while keeping risk at a minimum. Here’s a final list of tips: 


1. Remember to think global and remember that the diverse markets are connected together in today’s flat world. You are a citizen of the world. Do some research and get confident. 
2. Stay liquid. Reasonably protect your cash. In a downturn, cash is king. Limit the amounts of money you are willing to risk by using stop loss orders on your trades. Do not risk money you cannot afford to lose because you will not be able to think clearly as you are investing it. For example, if you have $15,000, then use $5000 to invest. Further consider how to allocate the $5000 toward safer or riskier investments. Do not risk the other $10,000 cash. That is your survival and peace of mind. 
3. Take foundational positions in defensive longterm stocks that pay dividends. 
4. Take a position in oil and commodities at today’s prices. 
5. Identify values and bargains. There is plenty of research already at your fingertips identifying those companies for you. 
6. If you are going to make shorter term trades, have a strategy which includes stop losses, economic analysis, technical analysis and stick to it without emotions. If you can’t do that, DON”T TRADE. For example, if you are going to make ten trades, use stop loss orders in place. You will possibly lose $200 on half of the trades while earning $500 on the other half which were good trades. That’s following a trading strategy that makes money, not haphazardly gambling. You can do this by opening an account at www.ameritrade.com or other brokerage companies. And the final big tip and needed disclaimer. Do not jump off the bridge because Mario said it was an adventurous thing to do to get over your fears and then send him the bill for your broken leg. This is an educational article. Do your own research and make your own choices. This is article is not to be considered investment advice nor recommendation to buy any investment. This article includes overviews and explanations of what other investors and companies might do. Options trading is much riskier because you don’t own anything and could lose all the money you invest. You must learn and understand and read and agree to all policies offered by brokerage firms before investing. They and I are not responsible for any gains or losses you experience.