Lessons learnt from Wall Street

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<ul><li><p>Publication: Jamaica Observer; Date: Sep 28, 2008; Section: Sunday Finance; Page: 10F</p><p>Lessons learnt from Wall Street </p><p> THERE are many lessons to be learnt from the present crisis in the US financial market, mainly that good ole Uncle Sam has a serious</p><p>weakness. Americans lack of propensity to save is a dire cause for concern. The current Wall Street crisis is very similar to our own FINSAC</p><p>catastrophe that required an urgent bailout and the impact was severe for some, but presented cheap gifts for many. Individual lifestyle</p><p>decisions affect us collectively and it is evident throughout this crisis that it is countries such as Japan, South Korea and China, which have</p><p>higher Marginal Propensities to Save (MPS), that are able to capitalise on some cheap stock prices now, because they have the cash saved.</p><p> The average American is saddled with US$16,635 in debt, excluding mortgages. Americans have approximately US$1 Trillion of credit card</p><p>debt excluding mortgages, and if mortgage debt is included it stands at US$12 Trillion. This stems from an American attitude towards debt</p><p>overall, which needs to be moderated. Mortgage debt, as we all know, is the bane of Wall Street's existence. It is not prudent to purchase a</p><p>US$300,000 home with just a salary of US$50,000. Neither is it sensible for a corporation to invest more than 20 per cent in one asset class,</p><p>particularly bad debt securities. Most on Wall Street overlooked this rule.</p><p> The Securities Exchange Commission (SEC) had not put the necessary framework in place to prevent this among other catastrophes from</p><p>happening. Now that the mortgage bubble has burst Credit Default Swaps (CDS) that once had no regulation and were able to act</p><p>independently and free from all scrutiny are being placed under the microscope. CDS in addition to ratings agencies are now forced to</p><p>conform to tighter regulations under the suspicion of misleading investors about their true exposure to the credit crisis. It's about time these</p><p>credit- laden Special Vehicle Securities (SVS) and ratings agencies allow for better transparency.</p><p> All is not lost though, because the FED is trying to come to the rescue and after the downside we ought to see life back to normal. If we are</p><p>not at the bottom, let's just say we are very near. It's time for Jamaican investors to focus on protecting our portfolios and purchasing the</p><p>cheap instruments up for grabs. Currently, worldwide investors are still uncertain about how much exposure these institutions have suffered</p><p>and are very wary of US stocks and corporate bonds. Gold is where the money is safest and for local purposes Real Estate is the Jamaican</p><p>gold. Look out for some more Real Estate Investments offered here in the near future.</p><p> Although investors may be scared, there are many cheap high-value companies for sale at this time which will be profitable in the long term.</p><p>Citigroup (C), for instance, is the largest public company worldwide and also the world's largest bank by revenues, so we can have faith that</p><p>there is no way the Government will allow it to fold. This would be an excellent time to SHORT Citigroup (C) over the medium term (if it were</p><p>permissible). However, due to current SEC restrictions, we recommend a BUY on Citi if the price pulls back to US$10-12 in the short term</p><p>based on the Fed's bailout package. The rebound is in sight for sure as Citigroup has many oil owners at its helm and the Dubai wealth fund</p><p>may look to go in as soon as oil prices increase. In addition, there are talks about Citigroup acquiring Wachovia and there are possibilities of</p><p>other mergers in the financial sector which ought to build investor confidence and help the stock price surge. Expect a 30 per cent increase</p><p>above book value (US$20.08) by</p><p>next year assuming that this is indeed the bottom of the barrel for financials. Just last October Citigroup was at US$48.77. So indeed, we can</p><p>Lessons learnt from Wall Street http://digital.olivesoftware.com/Repository/getFiles.asp?Style=OliveXLib:LowLevelEntityToPr...</p><p>1 of 3 01/28/2013 4:16 PM</p></li><li><p>manage to seize this opportunity.</p><p> Let's get back to the whole credit concept again. The effect of putting your hat where you can't reach it also applied to the corporations.</p><p>These banks overleveraged their balance sheets and became dead broke as a result of overextending themselves and having too much</p><p>exposure in the midst of the economic crisis. Take a look at the approximate leveraging ratios for some US financials; Bear Stearns 25:1,</p><p>Lehman Brothers 25:1, Morgan Stanley 30:1 and Goldman Sachs 25:1. The benchmark by the way based on risk analysis is at most 5:1. This</p><p>needs to be curbed. The regulatory bodies are called upon to provide better enforcement with regard to this issue. The Bear Stearns collapse</p><p>is a testament to the dangers of overleveraging.</p><p> The extent of regulation in a free market has always been a topic of constant evaluation. Where consumers lack the will power to curtail bad</p><p>habits, the Government needs to offer mechanisms to deter them. AIG's failing threatens not just the US but the world economy and</p><p>evidently more regulation is required to prevent world stagnation. Here in Jamaica, credit is becoming more accessible, the small and</p><p>medium businessmen need to look at the US situation and realise the importance of borrowing what can be afforded. We must adapt a</p><p>culture of saving for the rainy days to come, after which I recommend checking with Stocks and Securities Limited because just like with</p><p>FINSAC the auction is out and there are some very great deals to be had provided one has the liquidity.</p><p> Raul Haynes is a research analyst at Stocks &amp; Securities Limted.</p><p>By Raul Haynes </p><p>Lessons learnt from Wall Street http://digital.olivesoftware.com/Repository/getFiles.asp?Style=OliveXLib:LowLevelEntityToPr...</p><p>2 of 3 01/28/2013 4:16 PM</p></li><li><p>Lessons learnt from Wall Street http://digital.olivesoftware.com/Repository/getFiles.asp?Style=OliveXLib:LowLevelEntityToPr...</p><p>3 of 3 01/28/2013 4:16 PM</p></li></ul>