UBS landed at the top of the financial news today revealing a $10B write-down and an emergency injection of cash from sovereign wealth funds. The Government of Singapore Investment Corp and a group in the Middle East are providing a total of $11.5B in fresh capital.
The situation mirrors what was seen at Citi except that UBS went one step further in eliminating their cash dividend for 2007 and replacing it with a stock dividend. Overall this is a lousy deal for the common shareholders in that both their stock is being diluted and more UBS equity is being effectively relegated to the preferred shares column. However it is easy to counter that the common shares would be near worthless if the bank was not able to maintain their capital ratios or was forced to merge for pennies on the dollar (or centimes on the franc). Overall the market took the deal as good news driving UBS shares up nearly 2%.
During the upcoming weeks there is an increasing expectation that more major banks will follow the lead of Citi and UBS. The market can expect to see bailouts from sovereign funds, cuts in cash dividends, dilution of common shares, and further mind-numbing write-downs.
UBS to Sell Stakes After $10 Billion in Writedowns
http://www.bloomberg.com/apps/news?pid=20601087&sid=auWIldY77wRU&refer=home
Monday, December 10, 2007
Friday, December 7, 2007
The Mortgage Plan
The administration rolled out its mortgage initiative late this week. The plan will help 340,000 mortgage holders whose teaser rates are due to reset. Another 60,000 sub-prime customer are already so far behind on payments that they will not qualify for the plan. The standards for inclusions in the plan require that “the loan must have been originated between January 1, 2005 and July 31, 2007 when underwriting standards were at their worst. They must also have been made for at least 97 percent the value of the home, and the borrower cannot be more than 30 days delinquent.” The rate freeze scheme would lock in the initial teaser rates for a period of five years, avoiding payment increases for homeowners.
With an estimated 1.4 million homeowners expected to enter foreclosure in 2008, any plan that will possibly enable nearly a quarter of the houses to escape the situation is likely to be received positively on Wall Street. Reducing the number of foreclosures by 25% clearly reduces the stress on mortgage-backed derivative debt.
However the immediate upbeat reaction ignores the reality that the bulk of outstanding mortgages are still likely to flounder. A report released today shows that mortgage delinquencies have risen to a 20 year high. One in five adjustable-rate sub-prime loans had late payments in the quarter. The deterioration of the housing situation is accelerating. The U.S. is likely to establish new standards for peaks in foreclosures, crests that even exceed those in the 1930s.
U.S. Mortgage Delinquencies Rise to 20-Year High
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNNNcUnDqS_g&refer=worldwide
Subprime plan seen reaching 340,000
http://www.reuters.com/article/ousiv/idUSN0731666420071207
With an estimated 1.4 million homeowners expected to enter foreclosure in 2008, any plan that will possibly enable nearly a quarter of the houses to escape the situation is likely to be received positively on Wall Street. Reducing the number of foreclosures by 25% clearly reduces the stress on mortgage-backed derivative debt.
However the immediate upbeat reaction ignores the reality that the bulk of outstanding mortgages are still likely to flounder. A report released today shows that mortgage delinquencies have risen to a 20 year high. One in five adjustable-rate sub-prime loans had late payments in the quarter. The deterioration of the housing situation is accelerating. The U.S. is likely to establish new standards for peaks in foreclosures, crests that even exceed those in the 1930s.
U.S. Mortgage Delinquencies Rise to 20-Year High
http://www.bloomberg.com/apps/news?pid=20601087&sid=aNNNcUnDqS_g&refer=worldwide
Subprime plan seen reaching 340,000
http://www.reuters.com/article/ousiv/idUSN0731666420071207
Come take the Poll
A good number of people receive HingeFire via RSS or email. A new feature has been added to the blog homepage - The Market Poll
Every month a different poll will be posted on the top left of the blog. The current question is:
Will the market go up or down before Jan 1st?
Come drop by the blog at http://hingefire.blogspot.com and take the poll.
Every month a different poll will be posted on the top left of the blog. The current question is:
Will the market go up or down before Jan 1st?
Come drop by the blog at http://hingefire.blogspot.com and take the poll.
Thursday, December 6, 2007
Will State SIV Funds bankrupt local communities?
Many states are hiding a deep dark secret; they have been running investment funds that have bet heavily on mortgage-backed derivatives. Hiding behind financial confidentiality; many government officials loath to discuss the impending crisis. Significant portions of the money placed in these state funds comes from local governments who have been urged to allocate money in these vehicles in order to earn higher returns. Now the wheels are coming off.
The recent situation in Florida is a standard run on the “bank”. Very jittery local governments basically rushed the gate to remove money from the state fund over several days until officials shut down withdrawals on January 29th. Today the fund re-opened up to limited withdrawals of up to 13% of assets limited to $2 million. Action was described as brisk as many communities sought to recover something from the pending fiasco.
The local governments have every right to be nervous; currently many of these state funds are probably only worth only 30% of their “face-value”, as a continual cycle of downgrades hit their mortgage-backed SIV investments. Many local communities rely on these funds to pay pensions and operating expenses. A crisis in these state funds would leave many government retirees out in the cold and communities unable to meet payroll.
States such as Connecticut, Maine and Montana are experiencing similar scenarios with local governments rushing the gate for withdrawals, the quarantining of troubled fund components, and more than 20% of some funds being declared as defaulted SIV investments. The state government officials have moved to the defensive in recent days making statements that they expect the funds to “recover” and that state reserve funds can cover any contingent shortfalls.
So much for proper stewardship, most of these vehicles were sold to the state financial oversight boards as “safe” investments that would earn higher interest. Of course, Wall Street reaped exceptional fees for their involvement in these entities while hiding the actual risk involved from these government entities.
At this point, it is simply a question of how deep and painful the fallout for local governments will be rather then a question of if the downside SIV scenario will occur.
Reference:
Fund Crisis in Florida Worrisome to States
http://www.nytimes.com/2007/12/05/business/05invest.html
The recent situation in Florida is a standard run on the “bank”. Very jittery local governments basically rushed the gate to remove money from the state fund over several days until officials shut down withdrawals on January 29th. Today the fund re-opened up to limited withdrawals of up to 13% of assets limited to $2 million. Action was described as brisk as many communities sought to recover something from the pending fiasco.
The local governments have every right to be nervous; currently many of these state funds are probably only worth only 30% of their “face-value”, as a continual cycle of downgrades hit their mortgage-backed SIV investments. Many local communities rely on these funds to pay pensions and operating expenses. A crisis in these state funds would leave many government retirees out in the cold and communities unable to meet payroll.
States such as Connecticut, Maine and Montana are experiencing similar scenarios with local governments rushing the gate for withdrawals, the quarantining of troubled fund components, and more than 20% of some funds being declared as defaulted SIV investments. The state government officials have moved to the defensive in recent days making statements that they expect the funds to “recover” and that state reserve funds can cover any contingent shortfalls.
So much for proper stewardship, most of these vehicles were sold to the state financial oversight boards as “safe” investments that would earn higher interest. Of course, Wall Street reaped exceptional fees for their involvement in these entities while hiding the actual risk involved from these government entities.
At this point, it is simply a question of how deep and painful the fallout for local governments will be rather then a question of if the downside SIV scenario will occur.
Reference:
Fund Crisis in Florida Worrisome to States
http://www.nytimes.com/2007/12/05/business/05invest.html
Wednesday, December 5, 2007
Learn to Invest in Stocks
For many new investors one of the more frightening aspects of the financial markets is simply figuring out the mechanics of their on-line brokerage account and getting over the fear of performing transactions.
Fortunately for many novices there are resources that can provide some education and help ease them into performing stock transactions. One of the best ways to learn about investing is through paper-trading a simulated account.
There are multiple simulated account resources on-line. One of the best is Wall Street Survivor. This contest site provides a simulated brokerage account with all the features that you will find in your real account. Contests are run that last ten weeks with prizes rewarded for the best returns. There is an active community where you can learn including bulletin boards and blogs. Even if your intent is not to place first in the contest, this is an excellent environment to learn the basics of stock investing and try simulated trades before going up to bat “for real”.
For experienced investors, the contests (with cash prizes) are enlightening and educational. Wall Street Survivor is a valuable resource for investors at all levels of experience. Check them out at: FREE TO PLAY - Fantasy Stock Trading Challenge
Fortunately for many novices there are resources that can provide some education and help ease them into performing stock transactions. One of the best ways to learn about investing is through paper-trading a simulated account.
There are multiple simulated account resources on-line. One of the best is Wall Street Survivor. This contest site provides a simulated brokerage account with all the features that you will find in your real account. Contests are run that last ten weeks with prizes rewarded for the best returns. There is an active community where you can learn including bulletin boards and blogs. Even if your intent is not to place first in the contest, this is an excellent environment to learn the basics of stock investing and try simulated trades before going up to bat “for real”.
For experienced investors, the contests (with cash prizes) are enlightening and educational. Wall Street Survivor is a valuable resource for investors at all levels of experience. Check them out at: FREE TO PLAY - Fantasy Stock Trading Challenge
Tuesday, December 4, 2007
Screening to Win: MFI (Money Flow Index)
The overview below describes one of the common technical indicators – MFI and provides insights on how to utilize it in your stock selection. Hopefully this outline will provide traditional fundamental investors with some solid insight on how to incorporate technical indicators into their screening. The free HingeFire Stock Screener which can be found at http://www.hingefire.com is one of the few tools available that includes a wide selection of fundamental and technical criteria for selecting stocks. Using a combination of fundamental and technical screening is a powerful tool for winning in the market.
MFI
Money Flow Index Overview
The Money Flow Index is a momentum indicator utilizing volume that provides a sense of the money flowing in to and out of a security. MFI is created using a fourteen day period and compares the flow of money into a stock (positive flow) to the money flowing out of a stock (negative flow). Each day the average of close, low, and high is calculated and compared to the previous day. On days this average price exceeds the previous day is viewed as positive volume, on days below as negative volume. The positive and negative volume totaled over the 14 day period to create the MFI indicator.
Utilizing a scale of 0 to 100, the Money Flow Index is similar to other momentum oscillators. However MFI augments the underlying pricing information with a volume flow component when forming the oscillator.
The HingeFire tool provides
support to incorporate the Money Flow Indicator in your creation of screens for stocks. Users can scan to determine if the MFI indicator is greater than or less than the key 20 and 80 levels, and also establish if the MFI value has just crossed above (JCA) or below (JCB) these thresholds.
How to use MFI in screening
Many investors utilize the Money Flow Index to identify oversold and overbought conditions. MFI levels below 20 are generally considered oversold and those above 80 are considered overbought. However MFI can remain at these levels for lengthy periods of time.
MFI provides solid insight into medium term trends. Investors normally use the Money Flow Index to time transactions or to filter stocks to exclude.
Overbought Territory
Stocks with MFI levels above 80 are considered over bought. Note that a number of these stocks may continue to rise in price and exhibit high MFI readings for a period of time. Most of these stocks are due for a tumble however as they approach an exhaustion level of available purchasers in the market. A number of traders screen for high MFI levels and then continually review the charts over a period of days for possible short candidates.
The MFI for MXM (MAXXAM Inc.) crossed
above 80 about 3 weeks ago and has remained at this level. A screen with the HingeFire tool found this as one of the many stocks with an MFI level greater then 80. Pulling up a recent chart for MXM demonstrates that the MFI is likely losing strength and will shortly cross below 80 shortly.
Oversold Territory
Stocks with an MFI below 20 are considered to be oversold. Some oversold stocks are due for a bounce back. Others have negative fundamental and trend information associated with them and may continue to dive in price with solid volume for extended periods of time.. A number of investors screen for stocks with low MFI levels and then sort through the results looking for value candidates at appealing prices. This is a form of searching for recently created value in the market, taking advantage of short term mis-pricing. At times a sector or individual stock is punished by the market pushing it down with volume to levels of attractive valuation. The MFI technical indicator can be used to screen for these situations.
BVF (Biovail Corp.)
recently endured a down trend with high volume and is below the 20 MFI level. An investor can research (or screen) the fundamental attributes of this stock such as P/E and see if it appears to be a solid value play now that the price has dropped to lower levels.
Break below Overbought
One common use for MFI is to screen for stocks that have just crossed below (JCB) the overbought condition at the 80 level. This normally serves as notice that the stock may continue to fall in price over the upcoming few weeks. Normally when MFI crosses below this level, the buyers have stepped away from the stock and upside volume is no longer present.
The MFI for MIDD (Middleby Corp.) just
crossed below the 80 level. This is one of the examples found in a recent screen using HingeFire for stocks that JCB (just crossed below) the 80 level for MFI. This is normally a sign that buying may be exhausted and the price will retreat for a period of time.
Break above Oversold
One of the most common uses for MFI is to scan for stocks that just broke above the oversold condition and now should continue to rise in price. A breakout above 20 indicates a solid change in momentum for a stock as it exits an oversold condition as the downside volume is reduced.
RRD (RR Donnelley & Sons Co.)
recently experienced a spree of selling with an associated drop in price over the past several weeks. The MFI just crossed above the 20 level which is a strong indicator that the selling volume is reduced and the stock has potential upside.
MFI
Money Flow Index Overview
The Money Flow Index is a momentum indicator utilizing volume that provides a sense of the money flowing in to and out of a security. MFI is created using a fourteen day period and compares the flow of money into a stock (positive flow) to the money flowing out of a stock (negative flow). Each day the average of close, low, and high is calculated and compared to the previous day. On days this average price exceeds the previous day is viewed as positive volume, on days below as negative volume. The positive and negative volume totaled over the 14 day period to create the MFI indicator.
Utilizing a scale of 0 to 100, the Money Flow Index is similar to other momentum oscillators. However MFI augments the underlying pricing information with a volume flow component when forming the oscillator.
The HingeFire tool provides
support to incorporate the Money Flow Indicator in your creation of screens for stocks. Users can scan to determine if the MFI indicator is greater than or less than the key 20 and 80 levels, and also establish if the MFI value has just crossed above (JCA) or below (JCB) these thresholds.How to use MFI in screening
Many investors utilize the Money Flow Index to identify oversold and overbought conditions. MFI levels below 20 are generally considered oversold and those above 80 are considered overbought. However MFI can remain at these levels for lengthy periods of time.
MFI provides solid insight into medium term trends. Investors normally use the Money Flow Index to time transactions or to filter stocks to exclude.
Overbought Territory
Stocks with MFI levels above 80 are considered over bought. Note that a number of these stocks may continue to rise in price and exhibit high MFI readings for a period of time. Most of these stocks are due for a tumble however as they approach an exhaustion level of available purchasers in the market. A number of traders screen for high MFI levels and then continually review the charts over a period of days for possible short candidates.
The MFI for MXM (MAXXAM Inc.) crossed
above 80 about 3 weeks ago and has remained at this level. A screen with the HingeFire tool found this as one of the many stocks with an MFI level greater then 80. Pulling up a recent chart for MXM demonstrates that the MFI is likely losing strength and will shortly cross below 80 shortly.Oversold Territory
Stocks with an MFI below 20 are considered to be oversold. Some oversold stocks are due for a bounce back. Others have negative fundamental and trend information associated with them and may continue to dive in price with solid volume for extended periods of time.. A number of investors screen for stocks with low MFI levels and then sort through the results looking for value candidates at appealing prices. This is a form of searching for recently created value in the market, taking advantage of short term mis-pricing. At times a sector or individual stock is punished by the market pushing it down with volume to levels of attractive valuation. The MFI technical indicator can be used to screen for these situations.
BVF (Biovail Corp.)
recently endured a down trend with high volume and is below the 20 MFI level. An investor can research (or screen) the fundamental attributes of this stock such as P/E and see if it appears to be a solid value play now that the price has dropped to lower levels.Break below Overbought
One common use for MFI is to screen for stocks that have just crossed below (JCB) the overbought condition at the 80 level. This normally serves as notice that the stock may continue to fall in price over the upcoming few weeks. Normally when MFI crosses below this level, the buyers have stepped away from the stock and upside volume is no longer present.
The MFI for MIDD (Middleby Corp.) just
crossed below the 80 level. This is one of the examples found in a recent screen using HingeFire for stocks that JCB (just crossed below) the 80 level for MFI. This is normally a sign that buying may be exhausted and the price will retreat for a period of time.Break above Oversold
One of the most common uses for MFI is to scan for stocks that just broke above the oversold condition and now should continue to rise in price. A breakout above 20 indicates a solid change in momentum for a stock as it exits an oversold condition as the downside volume is reduced.
RRD (RR Donnelley & Sons Co.)
recently experienced a spree of selling with an associated drop in price over the past several weeks. The MFI just crossed above the 20 level which is a strong indicator that the selling volume is reduced and the stock has potential upside.MFI Summary
Money Flow Index bears some similarities to RSI. However the Money Flow index utilizes volume in the calculation, providing an enhanced awareness of the size of fear and greed in the market.
A number of investors look at Money Flow Index on charts to scrutinize for divergences between MFI and the price trend of the stock. However the most common utilization of MFI is screening for oversold and overbought levels as outlined above.
Many investors focused on volume-driven technicals use the HingeFire tool to screen for the following situations with the Money Flow Index:
- Overbought Territory – Screening for stocks with RSI levels above 80.
- Oversold Territory – Screening for stocks with RSI levels below 20.
- Break Below Overbought – Screening for stocks that JCB the 80 level.
- Break Above Oversold – Screening for stocks that JCA the 20 level.
Combining technical indicators such as Money Flow Index with commonly used fundamental criteria when selecting your investments helps put the market edge in your corner. The MFI support in the HingeFire Stock Screener adds a powerful tool for searching for volume-related extremes that will improve the timing of your market transactions.
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