Global Stock Market BLOG - Mike Burnick

New Financial Market Watchdog Plan Lacks Teeth Were It’s Needed Most

Treasury Secretary Hank Paulson has been on-the-stump lately talking up Treasury Department plans to tighten government oversight of financial markets. Paulson will finally go public with this plan today, unveiling the details in a speech. Prepare to be underwhelmed!

In the wake of bank failures during the Great Depression, government oversight of commercial banks was tightened considerably in the 1930s in order to prevent future “runs on the bank.” These rules applied mainly to deposit-taking institutions, while oversight of investment banks was largely left in the hands of political appointees at the Securities Exchange Commission (SEC).

Just a few weeks ago however, we had a full-scale “run” on investment bank Bear Stearns, which brought the firm close to bankruptcy, before the Fed stepped in to arrange an 11th hour bail-out. Many were shocked at how a firm with Bear Stearns’ nearly century-old tradition and reputation could so rapidly deteriorate to the point of insolvency.

The Fed reasoned that Bear was too important a player in the financial system to allow an outright failure. Such an event would leave far too many “counter-parties” (other financial firms that transact business with Bear Stearns) hung out to dry – triggering widespread panic.

Since these events, Hank Paulson – former investment banker at Wall Street’s venerable Goldman Sachs – has been charged with coming up with fresh ideas to prevent such a mess from happening again. The solution: pretty much more of the same!

According to details of the Treasury Department’s proposal, already being circulated ahead of time, new oversight of financial markets looks a lot like the current flawed program.

In fact, “regulation will be limited to institutions that receive explicit federal guarantees — that is, institutions that are already regulated, and have not been the source of today’s problems” opines Paul Krugman in today’s New York Times.

Two of Wall Street’s biggest special interest groups are conspicuously left out of the new oversight plan: investment banks and hedge funds. Never mind that it was the failure of two over-leveraged Bear Stearns hedge funds last summer that kicked off this whole credit crunch market shock that’s still impacting markets. Clearly Wall Street isn’t to blame for this mess. Right?

In fact, the Treasury Department’s plan does “virtually nothing to regulate the many new financial products whose unwise use has been a culprit in the current financial crisis,” according to the Times.

Instead, Paulson’s plan sings an old familiar refrain: “market discipline is the most effective tool to limit systemic risk.”

Considering the discipline and risk management (or glaring lack thereof) practiced by Bear Stearns... who needs more stringent oversight anyway?

The Great Unwinding Inches Closer to Reality... in South Korea

The South Korean’s are poised to begin dumping Treasuries. The reasons: yields are too low after 300 basis-points of Federal Reserve rate cuts since last fall; and the volatile greenback is giving investors' fits.

My colleagues Jack Crooks and Sean Hyman have long pointed out the fact that an uncomfortably large share of U.S. government bonds reside in portfolios of global central banks and other international funds.

The danger is a “great unwinding” of these holdings in which investors, fed up with the sinking dollar and U.S. policy, decide to “strategically reallocate” these assets to more compelling investment opportunities elsewhere.

In other words: foreigners begin dumping Treasuries in mass – sending the dollar into free-fall – and U.S. interest rates soaring. This doomsday scenario inched a bit closer toward reality this week, as South Korea announced just such a “reallocation” out of Treasuries.

South Korea’s National Pension Service (NPS) with $220bn in assets is the world’s fifth-biggest pension fund. This week the NPS said it “will no longer buy US Treasuries because yields are too low. The move signals what could be a big shift by financial institutions away from US government debt into higher-yielding assets”, according to a story in the Financial Times.

One of the fund’s investment managers said: “It is difficult to buy more US Treasuries because the portion of our Treasury investment is already too big and Treasury yields have fallen a lot.” Indeed the yield on 2-year Treasury Notes has tumbled from about 5% last summer, to yield less than 2% now.

Another fund manager with the South Korea’s NPS explains (emphasis mine): “The Fed continues to cut interest rates. We are still making profits from the Treasuries that we bought in the past but we think we’d better dispose of them and had better buy higher-yielding European-government debt.”

Last week, Asian central bankers at a conference in Indonesia said they might invest more of their one-trillion dollars of official reserves “in one another’s sovereign bonds instead of US Treasuries, given the dollar’s volatility”.

Could this be the beginning of the great unwinding? Stay tuned...

Another Energy Sector “Pair” with High-Octane Profit Potential

In yesterday’s post, I explained how increased market volatility is a good time to looks for “pairs” trades, which give you a handy hedge in unsettled financial markets.

A few months ago, I wrote about just such a profit opportunity in a spread trade between natural gas and crude oil. At that time I was concerned about a potential energy-sector correction due to slowing growth; a correction that may have now started. So rather than make an outright directional bet in energy markets, I saw an opportunity to profit from a spread trade instead.

Specifically, I was bullish on the price of natural gas, which was way undervalued relative to its cousin, crude oil. In such a trade, it doesn’t really matter where the overall market goes, just so long as the spread narrows, you’ll make money.

A similar opportunity is now in place between crude oil and its distillate offspring, gasoline.

If You Think Prices at the Pump are High Now… Hold on to Your Wallet

Since June 1st last year, crude oil surged almost 58% higher in price, that’s including its recent pullback to just above $100 a barrel. Over the same period however, the price of unleaded gasoline has only advanced about 19%.

Now, I realize many of us are already suffering from sticker-shock at the pumps these days. In fact, my soccer-team toting Ford Explorer now takes about 80-bucks per fill-up! I’d switch to a Honda, but I just can’t fit six 11-year old soccer players in it – unless I strap a few on the roof.

Anyway, back to the spread-trade in gasoline and crude. Gasoline prices are spiraling to record highs already, but hang on to your wallets, because indicators I watch suggest a gallon of unleaded may soon shoot even higher in price.

Here’s the thing: prices at the pump usually climb as America enters its summer travel season, boosting demand for gas. Over the past five years, demand for gasoline has jumped on average 4% between April and July, according to a recent Bloomberg article.

Crude Oil and Gasoline Prices are Out-of-Whack

Commodity traders should be bidding up the price of unleaded gasoline to match rising crude oil, and in anticipation of seasonal trends kicking in. However, unleaded gasoline is actually dirt-cheap right now compared to crude.

In fact, Bloomberg points out that: “a barrel of wholesale gasoline fetched 50-cents less than crude oil last week.” This marks only the fifth time in the past 20 years that refined gasoline sold at a lower price than crude, according to data from the New York Mercantile Exchange.

As seasonal trends begin to kick in – and April is just a week away – we could see unleaded gas play catch-up to crude in a very big way. In fact, research suggests that investors who sell crude oil to buy gasoline “may return about 20-percent by June” as the price difference between the two is bound to rise in favor of gasoline, according to Bloomberg.

Now Here's A Handy Way to Play It...

Until recently, investors in unleaded gas had pretty much just one option: open a commodity-futures trading account. But in February, the folks that came out with the first crude oil ETF (USO), and the first natural gas ETF (UNG), struck again: launching the U.S. Gasoline ETF (UGA). This fund tracks the price of gasoline, as measured by changes in the price of futures contracts for unleaded gasoline traded on the New York Merc.

So it’s now possible for you to easily execute this particular “pairs” trade with ETFs in your standard brokerage account, and you can do it all in the same fund family – by shorting USO and going long UGA.

Now let’s hope lots of Americans are willing to load up the family-truckster for summer vacation... $4-plus gasoline notwithstanding!

P.S. Today, readers of my signature investment service, Market Shock Trader closed out a call option trade on the U.S. Natural Gas ETF (UNG) for gains of 159.7%. If you would like to access details of my NEXT energy sector options play, sign up for a risk-free trial of Market Shock Trader.

Market Volatility Leaves Me Searching for More Profitable Pairs

Stocks enjoy triple-digit gains one day – then suffer equally big losses the next.

Commodities are soaring on a rocket-ride to the moon two weeks ago – then suffer the sharpest correction in over fifty years last week!

So what gives with financial markets these days anyway? In a word: VOLATILITY! And you may as well get used to it.

The Fed’s massive easy-money-fest may actually succeed – at least for awhile – in sparking a rally in some stocks. The most beaten-down sectors are particularly good candidates. But I very much doubt the worst of this mess is over just yet.

In fact, the sheer magnitude of the Fed’s recent Hail-Mary money give-away shows you just what desperate straits we’re in. It’s time for desperate (and drastic) measures from our illustrious central bankers. Anything to keep Wall Street’s head above water!

It’s likely to be a volatile environment for ALL financial assets until the worst of this mess is over. Until then, I’m exploring new trades to take advantage of this volatility.

Natural Gas Plays Catch-up With Crude

A few months ago, I told readers how to capitalize on cheap natural gas prices relative to expensive crude oil. That’s a perfect example of a “pairs” or hedge-trade. In this case I recommended going long natural gas (using the U.S. Natural Gas ETF) and short crude oil (U.S. Oil Index ETF).

What you’re looking for here is to exploit the price difference between two different but related assets: oil and natural gas.

Most investors are constantly making directional bets (either bullish or bearish) on markets. But here you are betting that since natural gas is undervalued relative to crude oil, as the price difference (or spread) narrows you’ll make money.

And the beauty is, it doesn’t really matter what’s happening in the overall market. Natural gas and crude can either rise OR fall – but as long as that price spread narrows in favor of natural gas – you will profit.

That’s exactly what happened over the past few months as natural gas prices jumped about 20% since the beginning of 2008. Meanwhile crude oil lagged and is now just about flat with NO gain since January 1st. This was a profitable narrowing of the price spread in favor of natural gas!

In fact, just last week subscribers to my signiture research letter, Market Shock Trader grabbed gains of 18% in natural gas since November. Now I see a similar trading opportunity ahead… and it’s also in the energy complex. I’ll give you all the details in my blog tomorrow, so stay tuned…

Taiwan Votes for Closer Ties with Mainland China

Campaigning on a platform that includes closer economic ties with mainland China, and increased domestic spending, Taiwan's stock market surged after Ma Ying-jeou won the presidential election over the weekend.

Taiwan’s benchmark Taiex Index surged nearly 4% overnight on the news. A certain amount of this good news was already factored in by investors, since Taiwan has been Asia’s best performing market this year – up about 11% just since February 1st.

Still, the party in Taiwan shares may just be getting started.

In a January blog post (It’s Not Too Early to Search for Bargains Amid the Global Market Bust), I said: “Taiwan is one of the best global value plays (almost as good as Japan) on the planet right now. In addition, there’s a great election-year catalyst set to play out in Taiwan that could easily send this market sky-rocketing in 2008.”

In spite of recent gains in Taiwan, there should be lots more to come.

This week’s election victory for the Kuomintang should not be underestimated for its potential impact. And the market rally it ignited shouldn’t be taken lightly either. Trading volume on the Taipei Exchange swelled to twice its daily average over the past 3 months, as a record $1.9 billion of foreign cash inflows rushed into stocks. About 13 stocks advanced in Taiwan for each share that declined – that’s incredibly strong breadth.

Taiwan has always enjoyed close ties with the mainland, but for decades, politics got in the way. The specter of war has hung over Taiwan’s stock market for years. Periodic saber-rattling – on both sides of the Taiwan Straits – made international investors feel a bit uncomfortable. Now that’s all about to change for the better.

Taiwan’s President-Elect Pledges Closer Ties to Mainland

Interviewed on the campaign trail earlier this month President-elect Ma said: “Under my presidency, there will be peace and prosperity across the Taiwan Strait instead of confrontation and tension.”

He has also pledged to begin direct flights to China in just a few months, as well as loosen restrictions allowing Taiwan firms to invest more than 40% of their assets in China. Finally, Ma has talked about working “toward a common market across the Taiwan Strait,” according to Bloomberg.

Strengthening ties between Taiwan and the world’s fastest growing economy should be a major benefit to both. Now, politics is moving aside and that should allow foreign fund inflows to accelerate at a faster pace, having already hit a record in anticipation of this event. One Asian investment manager interviewed by Bloomberg put it simply: “There'll be significant synergy with China now.”

Taiwan enjoys a very favorable position because it’s loaded with capital: both financial and intellectual. Taiwan is one of the most prosperous nations in Asia, and for decades Taiwan business has helped finance the mainland boom. Taiwan also has more graduate-degree students per capita than any other nation in Asia, meaning that Taiwan has the know-how to help the mainland solve its problems and prosper.

Taiwan Stocks are a Much Better Bargain Than Shanghai

Setting aside all the hope about the future, one fact about Taiwan cannot be denied: its stocks area a screaming bargain compared to mainland China.

While the CSI 300 Index of domestic shares listed in Shanghai and Shenzhen continues to trade at more than 40-times earnings (even after a 30% decline since October), shares in Taiwan change hands at just 12 times earnings. Also, Taiwan stocks offer a healthy dividend yield of 4%. That’s very attractive dividend income in today’s low interest rate world.

I find China one of the most fascinating and potentially profitable markets to be invested in the years to come. But as long time readers of this blog know, I believe the best way to invest in China is through much more attractively valued markets such as Hong Kong and Singapore.

Global investors also have another choice for investing in China. It’s more direct – and a much better bargain – it’s a good time to invest in the other China: Taiwan.

Don’t Fight the Fed: It’s Clear They’ll Do Whatever It Takes to Win This Liquidity War

A saying as old as Wall Street itself cautions investors: “don’t fight the Fed!” Massive central bank intervention has always worked in the past – and will inevitably work this time too – it’s just a matter of time.

Once upon a time, the Federal Reserve’s mandate was two-fold: maintain price stability (fight inflation) and full employment (promote economic growth). Not anymore. Now, bailouts like Bear Stearns (or Long Term Capital in the Greenspan era) are the norm.

Globetrotting investor Jim Rogers recently pointed out in a Bloomberg interview that the Fed’s mandate is: “to keep a sound currency, not to prop up Wall Street." The Fed has already “trotted out hundreds of billions of dollars to prop-up their friends on Wall Street.”

The Fed’s “propping-up” seems to be working, at least for now. Wall Street’s “primary dealers borrowed more than $13.4 billion a day from the Federal Reserve in the latest week”, according to Reuters.

Firms including Bear Stearns, Goldman Sachs, Morgan Stanley and Lehman Brothers tapped into the Fed’s easy money – and why not stock up on cheap cash – at interest rates as low as 2.5%. Total “discount window borrowing came to $19.05 billion a day in the latest week,” according to data from the Fed.

Another Inevitable Consequence of the Fed’s Easy-Money: Inflation

The key is for this easy-money to help lower the rates that matter most. As I said in a post yesterday: “Keep a sharp eye on 30-year mortgage rates.

Once they decline significantly, and for a sustained period, the financial sector will finally get lasting relief – and certain financial firms could make a killing.”

Homeowners too will get a chance to refinance their way out of adjustable rate loans before rate resets kick in. Stay tuned.

Of course another inevitable consequence of the Fed’s easy-money policy is structural inflation.

Consumer prices are climbing over 4% year over year. Producer prices (which will get passed through to the rest of us sooner or later) jumped nearly 7% over the past 12 months, with energy (up 19%) and food (up 6%) leading the way.

The chart above shows that long-term inflation expectations are on the rise – getting baked in the cake so to speak – but this process is just getting underway.

The inevitable consequence of this will be higher commodity prices – eventually.

Pairing Up Your Trading for Gains No Matter Which Way the Market Breaks

In recent days, commodities from gold to grains and everything in between have been hit hard by profit-taking. Gold suffered its biggest weekly loss since 1990, at one point falling over $100 per once this week. That’s not surprising since commodities are among the few “profitable” assets left to sell as institutional investors get hit with margin calls.

Look at a chart of nearly any commodity and you’ll see a parabolic run from lower-left to upper-right… so a correction in this asset class is way overdue in my view. Ultimately, this will provide you with a better buy-point for when commodities rise again.

In my Market Shock Trader service right now I’m focusing on ways to play the decline in commodity stocks with well-timed put options. This gives my readers a handy way to hedge their investments – and earn profits in the midst of a sharp sell-off.

At the same time, I’m singling out a few carefully selected call option bets to profit from the rebound rally we’re seeing in other stocks and sectors.

Some investors might call this a “pairs trading” strategy – going long (with call options) and short (with puts) at the same time – sometimes even in the same sector! I look at this as a solid all-weather trading strategy to profit from volatile financial markets.

Today, I’ll be sending my Market Shock Trader subscribers all the details on my next option recommendation. If you would like see the specifics of my next pick to profit in volatile markets, take Market Shock Trader for a risk-free test drive now.

Who Will Benefit From the Fed’s Funny-Money Bailouts

The Fed has certainly been hard at work trying to jump-start gridlocked credit markets. In fact, the Fed has already committed about $430 billion worth of Treasury securities from its balance sheet to pumping liquidity into the besieged banking system.

These “actions mean the Fed, and consequently U.S. taxpayers, are assuming additional credit risks” according to Bloomberg - no kidding. In fact, taxpayers will ultimately end up footing a much larger bill for this bailout – mark my words.

It’s clear the Fed is desperate to solve in this credit crunch market shock by any means necessary. The printing presses at the U.S. Mint stand ready to work overtime – the U.S. dollar be damned? The buck is caught in the cross-hairs – more “collateral damage” from the credit crunch. So just what has the Fed got to show for all this free money? So far, not very much!

The Rates that Matter Most Aren’t Responding to Fed’s Easy-Money

As the chart above shows, massive liquidity injections and aggressive cuts in overnight Fed funds have done little to reduce the interest rates that matter most – consumer rates. In fact, 30-year fixed rate mortgages have stayed ominously “sticky” at high levels in spite of the Fed’s best efforts to bring them down.

According to data from Freddie Mac’s national survey, the average 30-year fixed rate mortgage has risen about two-thirds of a percent over the past seven weeks and is now almost unchanged from when the Fed began cutting rates last September!

Interest rate spreads on mortgage-backed securities have also skyrocketed even as the Fed funds rate tumbled from 5.25% to just 2.25% in the past six-months. This is throwing a major monkey-wrench into the Fed’s attempt to rescue the financial sector.

The problem is there are about 2 million adjustable rate mortgage loans outstanding due to reset from low teaser-rates to much higher long-term rates. Many of these homeowners are willing and eager to refinance to more favorable rates, but so far lower rates just aren’t available in spite of steep rate cuts by the Fed.

Hopeful Signs

Yesterday, government authorities said they would allow Fannie Mae and Freddie Mac, the big government-sponsored mortgage players, to reduce their capital reserves by one-third. This has the effect of freeing up about $200 billion in additional cash for Fannie and Freddie to buy up mortgage backed securities and make more home loans available. It should also have the effect of lowering mortgage rates somewhat.

Keep a sharp eye on 30-year mortgage rates. Once they decline significantly, and on a sustained basis, homeowners will finally get some relief – and certain firms in the financial sector could make a killing.

There are many regional banks that haven't reported billions in subprime loan losses. That's because they were smart enough to stick to their core-business of making solid home loans to credit-worthy borrowers. And they didn't buy up billions in (now toxic) subprime securities trying to eek out a tiny spread over Treasuries.

These banks have solid balance sheets - and their share prices will be the first to bounce back in a big way. Recently, I recommended a way to play this sector in a single trade to my Global Market Investor subscribers. To get more details on this, and all my recent recommendations, check out my service.

What's Your Bank Really Worth... in a Fire Sale?

If ever investors needed reminding about just how IRRATIONAL financial markets can be, Monday’s drama surrounding the Bear Stearns melt-down was a great object lesson.

At Friday’s close, the stock market said Wall Street’s fifth-largest firm Bear Stearns, was worth $20 billion. As trading began on Monday morning Bear Stearns was valued at less than $300 million – that’s all J.P. Morgan was willing to pay at fire-sale prices – amid the biggest financial panic to grip Wall Street since the Great Depression.

That’s a huge swing in the market’s estimation of the stock's value. And it isn’t just Bear Stearns subjected to this wild swing in valuation.

As Bloomberg columnist Caroline Baum wrote recently: “We live in perilous times. Crises are cropping up faster than the Fed can propose solutions to stabilize them.” How true! In fact, in such a manic-depressive environment as this, who can really be certain of the quoted value of anything?

Wall Street firms thought they were certain about the value of asset-backed securities. However, the assortment of CMOs, CDOs, and other securities at the center of this credit storm are just too illiquid at this time to be valued at all.

The bottom line is that these securities are only worth what someone else is willing to pay… at fire-sale prices.

Wall Street’s announced losses and asset write-offs so far total nearly $200 billion. That number is bound to climb much higher in coming weeks as more firms announce dismall first-quarter results. How much more losses are still lurking on Wall Street’s collective balance sheet?

How much more of this can the stressed-out financial sector take? How many more Bear Stearns are out there… is Merrill Lynch safe, what about Bank of America, or Wachovia?

Estimates are of course all over the map. When the credit crunch first began last summer, Treasury Secretary Henry Paulson confidently claimed that total losses should be confined to $50 billion, WRONG.

Actual losses are four-times that amount already and still growing. I have seen estimates ranging anywhere from $400 billion, to upwards of $1 trillion dollars in eventual losses stemming from this credit crunch. The truth is, no one knows for sure.

The saga of Bear Stearns is a sobering reminder of the fragile state of the highly leveraged financial sector. In this game of musical chairs, the music stopped last Friday at four o’clock, and by Monday at nine, Bear Stearns had lost its seat. According to the Bloomberg article, the firm was “too big to fail, too weak to continue operations, and too intertwined with counterparties to go down without causing serious collateral damage.”

I wrote about this potential for more “collateral damage” in recent blog articles. Collateral damage is just what keeps me up at night, wondering about where the next shoe will drop. Minimizing collateral damage in the financial system is exactly what’s on top of the Fed’s agenda too. That’s clear from the dramatic steps the Fed is taking to guarantee $30 billion worth of Bear Stearns “at risk” securities as part of the fire-sale to J.P. Morgan.

The Fed is also slashing interest rates and injecting liquidity as never before. Capital in the banking system has already fallen hard, amid $200 billion in announced losses and write-offs, with more to come. Once “bank capital falls below regulatory minimums relative to assets, financial institutions have to sell assets, which sets in motion the kind of downward spiral the Fed was looking to prevent,” according to the article.

In spite of the big rally yesterday, led by financial firms, I doubt we’re out of the woods just yet. Tune in again tomorrow when I'll discuss just how little impact the Fed has had in easing this credit crunch market shock. The next desperate move the Fed is likely to make will lead to more short-term profit opportunities – and will also have important long-term implications for your investments. Stay tuned!

The Great Credit Ratings Cover-Up

Last week, I commented about the Fed’s latest free-lunch: cooking up a 28-day term auction for a cool $200 billion. This morning, investors are hearing about a bailout deal for Wall Street broker Bear Stearns, hastily arranged over the weekend by the Fed.

These are just the latest in a growing series of central bank-sponsored interventions. Each time it swings into action, the Fed inches ever closer to the moral-hazard of an outright bailout for Wall Street. In fact, this is the closest the Fed’s ever come to Ben Bernanke actually dropping dollar bills from a hovering helicopter! Give him time – he’s working up to it.

The Fed has been widely lampooned for being “behind the curve” in coming up with creative solutions to the credit crunch. They’ve been accused of being either too slow, or too timid, in acting to relieve the crisis.

Last week the Fed’s timing was perfect in rolling out it’s plan to allow big banks and other “primary dealers” in the financial sector to swap their mortgage backed securities (of highly questionable value) for high-grade U.S. Treasuries. This $200 billion credit swap has a term of 28 days… just enough to tide troubled financial firms over safely into the middle of April… after the books are closed on first quarter results on March 30!

In fact, the Fed is pulling lots of strings these days just to keep the financial system solvent. Consider the great credit ratings cover-up that’s currently taking place.

A recent Bloomberg article details how the nation’s largest credit rating agencies have turned a blind-eye to deteriorating credit-worthiness in Wall Street issued asset-backed securities.

“Even after downgrading almost 10,000 subprime-mortgage bonds, Standard & Poor's and Moody's Investors Service haven't cut the ones that matter most: AAA securities that are the mainstays of bank and insurance company investments.” In fact, an estimated $120 billion in subprime bonds – still rated AAA by the agencies – DO NOT meet the standard for such top ratings.

Some of this AAA-rated debt in fact has fallen as low as 61-cents on the dollar amid record home foreclosures and sky-rocketing default rates among similar bonds. According to one hedge fund manager interviewed for the Bloomberg article, “Downgrades of AAA and AA bonds are imminent, and they're going to be significant.”

A look inside one of these bonds tells a frightening tale. An $80 billion subprime asset backed bond issued by Deutsche Bank in 2005 is still rated AAA by S&P and Moody’s. Yet, 18% of the mortgage loans in the security are in foreclosure.

Additionally, 15% of the properties underlying the loan values for this security have already been seized by lenders. Another 10% have been delinquent for more than 90-days.

Another subprime mortgage-backed security issued by Morgan Stanley Capital has credit support of 64% relative to the number of delinquent mortgages loans in the pool. But the credit should be at least twice the delinquent mortgages to maintain a top rating. Technically, much of this so-called triple-A rated debt should have been downgraded long ago. So why hasn’t it? The simple answer is: fear of too much “collateral damage.”

According to the Bloomberg article; “Financial firms own high-grade collateralized debt obligations, which package securities such as mortgage bonds and slice them into pieces with varying risk. As the underlying mortgage bonds are downgraded, those securities will also lose their ratings and tumble in value.”

There’s a huge potential “contagion” effect that would ripple through the financial system were these shaky subprime credits to be downgraded across the board. For instance, a bank holding $100 million of AAA-rated subprime bonds needs just $1.6 million in capital backing such a highly rated credit – that’s a lot of leverage. And such leverage is fine, as long as the bonds remain triple-A rated.

Should the bonds get downgraded to below investment grade however, under global accounting rules a bank must put up additional capital. In fact, it would take $16 million in capital to back $100 million in non-investment grade bonds.

That’s 10 times as much capital required in the event of a credit ratings downgrade. Wall Street just doesn’t have that amount of extra capital lying around. Bear Stearns found this out the hard way over the weekend. That’s why I expect the major ratings agencies, perhaps abetted by the Treasury Department and the Fed, to continue covering-up the true health of $650 billion in outstanding subprime bonds.

Should these ratings get cut now, the consequences might be unimaginably bad for Wall Street.

In the Eye of the Subprime Storm: Mother Nature Can’t Compare to the Disaster Man has Wrought

There’s a new “disaster” that will soon top the record books as the biggest ever to impact the U.S. insurance industry.

No, it isn’t an earthquake in California. And it’s not a Midwestern tornado. It’s not even a Hurricane – that was the previous record-holder.

It is the “collapse of the subprime mortgage market,” which according to Bloomberg is responsible for record setting losses at insurance companies. This disaster of mankind’s own making will soon surpassed even Hurricane Katrina as the worst ever in U.S. history!

The total amount of outright losses and asset write-offs reported by U.S. insurers has so far reached $38 billion. That’s just shy of the $41.1 billion final tally for insured loss claims from Hurricane Katrina, which devastated New Orleans and the Gulf Coast in 2005.

And there’s little doubt about more subprime losses to come.

In fact, ratings agency Standard & Poor’s has either “downgraded or placed under review more than $350 billion of collateralized debt obligations.” It’s a sure-thing that at least some of this toxic debt will default prior to maturity.

In fact, default rates on some of Wall Street’s existing subprime CDO’s are running above 20%! Should the CDO’s currently “under review” at S&P suffer the same default rate, about $70 billion in additional losses will result!

I’m not certain exactly how much of these losses would be insured, but suffice it to say that Katrina’s $41.1 billion record is about as safe as Hank Aaron’s home-run record was last season.

At least there was a silver-lining for insurers after Katrian. The industry easily pushed through rate increases in disaster-prone areas – like my homeowners policy here in Florida which went through the roof. Higher insurance premiums boosted balance sheets and stock prices for U.S. insurance companies, and led to record profits.

Today by contrast, “insurers are stuck holding mortgage-related investments in a market where there are so few buyers that it's hard to know what those assets are worth,” according to Bloomberg. In fact, 2007 was the first time in eight-years that the combined book value (assets minus liabilities) of firms in the KBW insurance industry index actually declined on a full-year basis.

This is indeed a “disaster” for the U.S. insurance industry, and the storm has not yet passed.

There are an estimated $1.7 trillion in subprime adjustable rate mortgages scheduled to reset to much higher interest payments in 2008! This will surely result in billions more of asset backed losses over the next 12-months.

Bottom line: we’re now in the eye of this man-made hurricane. But watch out for the devastating winds in the backside of this subprime storm!

Taxation Changes Boost Singapore's Wealth Management Sector

Recently, I wrote about how a new round of tax cuts makes Hong Kong an even more attractive place to live and work. Our friends at Global Consultants and Services Limited remind me that neighboring Singapore is another very attractive total wealth destination in this dynamic region.

Singapore has long been a key hub of Asian wealth management. In fact, private-bankers rank Singapore as second only to Switzerland. Strict banking secrecy laws and favorable tax treatment (modeled after the Swiss) is attracting a growing wave of wealth to Singapore from well-healed investors throughout Asia.

In fact, the number of Singapore based private banks jumped from just 20 in 2000, to 42 today. Meanwhile, total banking assets under management climbed six-fold, to $300 billion recently, up from $50 billion in 1998.

Long-time Sovereign Society friend and council of expert member Jack Flader and his firm, Global Consultants and Services Limited (GCSL), is located right in the heart of this booming region.

Based in Hong Kong, and with offices in Singapore (among other hot spots in Asia), GCSL is uniquely positioned to keep Soveriegn Society Members up to speed on the latest business developments in Asia.

In fact, Lawrence Fong, the Managing Director of GCSL’s Singapore office explains how Singapore’s recent move to entirely abolish estate taxes is bound to draw even more wealth management business to this city.

Singapore recently “removed the Estate Duty with immediate effect,” according to Lawrence. “Up to now, estate duty affects those with properties worth over S$9 million as well as those with over S$600,000 in non-property based assets like cash, stocks and even expensive cars and watches.”

With the Estate Duty abolished, this creates another very big incentive to consider Singapore as your wealth management destination of choice, according to GCSL. “The abolition of the “Heaven’s Gates Tax” was implemented to attract the super rich not only to invest in Singapore, but also relocate here.”

In fact, well known global investor and author Jim Rogers just relocated his family from high-tax New York, to low tax Singapore, perhaps for this very reason.

According to GCSL, another change in Singapore law could have an even bigger positive impact on the wealth management industry there.

The government also announced a new "tax incentive scheme for family-owned investment holding companies." This grants such entities a broad range of tax "exemptions on both Singapore-based and foreign-sourced investment income." Of course this provides a huge incentive for Singapore “family enterprises” to bring more of their investment funds back home to be managed by local investment firms.

As GCSL’s man in Singapore says: “Bring it on!”

Just in the Nick of Time: Fed Engages in 28-Day End-of-Quarter Window Dressing

Was the Fed’s latest easy-money move yesterday an act of sheer desperation? Was this move triggered by a gridlocked financial sector that’s in imminent danger of imploding when the next shoe drops?

In spite of repeated rate cuts and massive central bank sponsored liquidity injections over the past few months – credit markets remain frozen and refuse to thaw out. A glance at this graph of Libor lending rates tells you that.

Remember, Libor has been an accurate barometer to watch for changes in this credit crunch all along. Lending rates first skyrocketed last summer, indicating growing financial market anxiety, the first round of credit stress.

The Fed, working with other central banks beat back the liquidity crunch for awhile, but it flared up again last fall. More easy money over the year-end holiday season pushed rates lower once more. As you can see, Libor rates have stubbornly climbed yet again in recent months. The credit crunch just won’t go away.

The problem is this: Banks, brokers, hedge funds, and other institutional investors are locked in a real “Mexican stand-off”, but without the pistols. Instead, the deadly arsenal these financial firms hold are pieces of an estimated $650 billion worth of sub-prime securities still outstanding. To date, the financial sector has “only” fessed-up to about $190 billion in losses... so far.

This tells me there are still a lot of potential losses sitting in financial sector portfolios as yet unaccounted for.

Anatomy of a Credit Crunch Standoff

Nearly everyone has some of these securities of highly questionable value on their books. No one can be sure what any of these securities are really worth... at fair market value... precisely because there is no fair and orderly market at the moment.

It is an acute crisis of confidence that has paralyzed these markets. The financial players at the table are already all-in. All of their equity capital chips on the table, fully at risk. These firms don’t have much confidence in the true value of their own mortgage backed securities holdings – let alone have confidence enough to buy someone else’s potential junk debt – and maybe get left holding the bag.

Everybody knows that somebody else will soon announce another huge write-down. It could be anybody. But one thing everybody is sure of is that somebody BIG (like the Fed) should really step in and bail us all out – so everybody can just get back to business as usual.

Fed Steps in as Buyer of Last Resort

When there is no longer confidence in underlying asset values – there simply isn’t any market, no trading, period. So the financial sector players sit silently at the table, sweating, and waiting for the turn of the next card. Now in steps the Fed, in its role as lender of last resort.

The Fed offers to reshuffle the deck... and with considerable slight-of-hand... deals everyone a new hand.

If financial firms don’t have the confidence to trade these mortgage backed securities with one another, the Fed says: “just trade with the U.S. Treasury. We will swap your AAA-rated securities for freshly minted Treasury bonds... no problem.”

Never mind that there’s very little confidence in the reliability of these so-called AAA credit rating at this point... “These credits look just right to us. So we’ll take ‘em off your hands in exchange for the highest-quality government script... no worries.”

Putting Off the Financial Day of Reckoning Yet Again

The Fed’s timing in this latest easy-money move is curious indeed. In just 15 days or so, banks, brokers and other financial firms will close their books on the first quarter. Then in come the accountants.

According to the latest financial accounting standards governing mark-to-market valuations, firms are forced to mark down the value of securities of questionable value at quarter’s end... like mortgage backed securities.

In other words, with just a few weeks left before another potential round of massive forced write-offs of sub-prime securities, in steps the Fed with an offer to swap these securities for Treasuries for a term of 28-days… conveniently beyond the end-of-quarter valuation period!

So the real question is: just how bad were first-quarter financial sector write-offs shaping up to be, that the Fed made such a drastic move. Was this merely a shameless attempt to paper-over and cover up the true magnitude of more severe mortgage loan losses?

Perhaps, but the Fed has only succeeded in pushing back the ultimate day of financial reckoning – disaster deferred – until sometime down the road. Stay tuned!

Returning Wealth to the People... Orient Style

As regular readers of this blog can attest, I have been unabashedly bullish on Hong Kong for some time now. However, the local Stock Exchange of Hong Kong has certainly not been immune to the global stock market correction. In fact, Hong Kong’s Heng Seng index has tumbled 17% so far this year, more than the S&P 500 decline of 11%.

However, there are lots of reasons to remain long-term bullish on this dynamic market. Not least of these is that Hong Kong is the traditional western gateway to mainland China, and benefits from booming investment flows to the People’s Republic.

Also, as Beijing continues to tinker with opening China’s closed financial system, Hong Kong will be a major destination for outbound capital flows from mainland Chinese investors too.

There’s no doubt in my mind that these trends will buoy Hong Kong shares again over the long run. But now there’s another excellent short-term reason to turn more bullish.

Huge tax cuts just proposed by the Hong Kong Monetary Authority should stimulate the economy even more in the near term as well!

Sticking to its pledge to “return wealth to the people,” the Hong Kong government just unveiled a package of tax cuts for next fiscal year that total nearly HK$52 billion (US $7 billion)… Washington DC, please take note.

Strong tax revenues thanks to robust economic growth of 6.3% last year, led to another huge budget surplus for Hong Kong. But rather than expanding its government to find new wasteful ways of “spending” this windfall, the government is doing the right thing.

The standard tax rate for Hong Kong taxpayers will be lowered to 15%, and the top marginal rate is just 17%. Contrast this with the IRS’s byzantine tax code that maintains a top marginal rate of 35%!

The stimulus package also includes among other measures, a whopping 75% reduction in profits, property, and salaries taxes paid in Hong Kong. Waivers for business registration fees, and an electricity charge subsidy are also included in the package.

Even taxes on beer and wine were abolished … attention duty-free shoppers!

The latest round of tax cuts is sure to stimulate the economy further, and draw more foreign (and domestic) businesses to expand operations in Hong Kong!

A Bull-Bear Battle Royal in Base Metals

There’s a massive tug-of-war taking place right now between bulls and bears… and I’m not talking about the stock market here.

This bull-bear debate is taking place in the futures market for industrial metals. The outcome holds major implications for the health of the global economy, and of course for stock markets world-wide.

According to a recent article in the Financial Times, “Debate is intense among analysts and investors over whether the commodity supercycle can be sustained.” Industrial or base metals have been one of the best performing asset classes this decade. Copper alone is up about 400% in price just since 2000.

Dr. Copper Correctly Foreshadows Fears of Growth Slowdown

Since 2006 however base metals prices went into a sharp tailspin, correcting over 30% in the last 18 months. In 2007 alone base metals declined over 20% even as other commodities were shooting to record highs. Why such a disconnect?

Industrial metals are often viewed as a key leading indicator for health in the overall economy.

In fact, it’s been said that: “Dr. Copper” is the most accurate economic forecaster on Wall Street. So the reason for the swoon in base metals has everything to do with fears of a slowdown in global growth.

More recently, base metals prices have firmed up strongly. Copper and aluminum prices are back within striking distance of all time highs. In fact, industrial metals as a group have rallied over 25% just since December.

A Good Gauge of Growth and Inflation

The bears arguer that base metal price are at unsustainably high levels on a historic basis, and don’t reflect the risks of a U.S. led economic slowdown. “It is difficult to envisage another bull market phase when factoring in a material slowdown in the global economy.”

The bulls counter that global infrastructure needs, particularly in emerging markets, should keep base metals in high demand for “years to come.” According to Morgan Stanley, $21.7 trillion will be spent on infrastructure in emerging markets alone over the next 10 years. That’s a lot of copper tubing and aluminum siding. Therefore, say the bulls, base metal demand should be insulated or “decoupled from the developed world growth slowdown.”

Another point in favor of the bulls is heightened inflation fears. Headline inflation in the U.S. moved above 4% in 2007, while in China inflation has accelerated past 7%. There has been a high correlation in recent years between rising industrial metals prices and expanding inflation expectations – very similar to the move in precious metals.

So to help forecast the health of the global economy, and for a good gauge of inflation fears, better keep a sharp eye on Dr. Copper, and his base metal buddies in the coming months.

For Bank Bargains, You Better Go Global!

Over the past few days, I’ve posted two articles on declining S&P 500 profits. If you missed them, you can catch up by clicking here, and here. In a nutshell however, the main culprit behind the rapid decline in corporate America’s profits is of course rapidly mounting losses in the financial sector.

Banks, brokers, insurers and other domestic financial firms have so far reported a whopping $54 billion plunge in profits for the fourth quarter alone. Contributing mightily to a decline of almost 20% in S&P 500 net income – and this figure excludes most of the so-called “one-time” charges.

Or course, you and I know that these “non-recurring” write-offs of bad debts that financial firms have taken for the past two quarters already, are likely to be highly-recurring in 2008 and beyond!

Some Banks Impacted Much Less by Subprime

However, parsing income statements from banks outside the U.S. reveals a recurring theme that I have mentioned before: this credit crunch (and the losses resulting) appears very much to be a U.S.-centric problem. Outside the U.S. many big banks are still doing fine… at least so far.

Case in point: HSBC Holdings Plc. This giant UK bank can certainly be accused of very poor timing, since it bought its way into the U.S. subprime fiasco with the 2003 purchase of the Household Finance company for $15 billion. Of course, that was just a few years prior to the top of the U.S.housing boom.

Household’s portfolio of loans to U.S. consumers with poor credit histories is gushing red ink now. In fact, HSBC just reported year-end 2007 financial results, and its North American division (largely the old Household Finance business) posted nearly $12 billion in loan losses – up 80% from a year ago!

Emerging Market Profits More Than Make Up for U.S. Credit Losses

If the story ended there, you could simply chock-up HSBC as another victim of the global subprime credit crunch. But this story has a much happier ending for HSBC shareholders… owing to the globally diversified nature of its banking business.

In fact, HSBC reported strong profit growth overall last year, with record pre-tax profits of $24 billion up 10% year over year – that’s including the steep losses from Household Finance. It seems “strong growth in Europe, Hong Kong, Asia and Latin America more than made up for the shortfall” in the U.S., according to a Financial Times report.

HSBC’s strategic focus is to “drive sustainable growth by concentrating on faster growing markets of the world,” according to Stephen Green, the bank’s chairman. In fact, the Asia-Pacific region accounts for 50% of HSBC’s pre tax profits, while other fast growing nations in Latin America and the Middle East account for another 14%.

Profits from HSBC’s Asia-Pacific business soared 57% in 2007… no credit crunch here. Earnings from the Middle East and Latin America each jumped 26% last year… no subprime losses in sight here either. HSBCs European operations even grew 23% for all of 2007, despite more recent signs of a slowdown in the Eurozone.

Buying Opportunities in Banks: Think Outside the U.S. Box

HSBC isn’t alone. Another big UK bank, Standard Chartered, which does even more business in fast-growing emerging markets, reported pre-tax profits this week up 27% from 2006!

I recently turned bullish on select overseas commercial banks, and smaller U.S. regional banks. Some well-managed banks in Europe, and especially in Japan, look particularly attractive right now. These banks aren’t suffering anywhere near the same degree of losses as Citigroup and Bank of America. That’s because overseas banks just aren’t as exposed to the U.S-centered credit crunch.

Because of poor timing in its ill-fated acquisition, HSBC has more exposure than most international banks – and even it managed to post a 10% profit gain – thanks to much stronger business in emerging markets. Standard Chartered, with even less U.S. exposure, is performing even better. Do you see a pattern here?

Global banks like HSBC, Standard Chartered, and others may not come away completely unscathed from the credit crunch, only time will tell. However, these banks are much better positioned for strong growth and a big rebound in share price than U.S. banks. Plus, in many cases they’re just as cheap, if not cheaper. Now that looks like a bargain to me!

Suspicious Earnings Forecast Adds-Up to Uncertainty for Stocks

Just around the corner and fast-approaching are first-quarter corporate profit reports. Judging from the dismal results posted in the last two quarters (which I discussed here yesterday), you would think Wall Street analysts are drastically reducing their optimistic expectations … but you would be wrong.

In fact, Wall Street’s Pollyannaish analysts are expecting quite a rebound in first-quarter profits for the S&P 500. That’s a view that seems hopelessly out of touch with the current reality of a worsening economy. This increases the specter of another looming disappointment for investors. The market’s current fragile state may not be able to withstand more bad news without crumbling again.

To be sure, not all sectors of the S&P 500 are created equal. Some groups should make out much better than others. The devil, as always, being in the details. Let’s take a closer look at the numbers.

First the Bad News: S&P 500 Profits Unlikely to Live Up to Rosy Forecasts

S&P 500 profits tumbled 9% in the third-quarter, which ended in September. The parade of pain intensified on Wall Street in the fourth-quarter, with earnings plunging nearly 24% year over year.  That’s the largest year over year profit decline in six-years! So what do analysts expect for this year: +17.4% profit growth for all of 2008!

You read that right, plus sign and all. Wall Street’s rosy forecasters call for a stunning upside reversal in earnings this year, starting with a gain (albeit just 1%) in first quarter profits. As you might expect, the second-half of the year is heavily back-end loaded. Current estimates call for 20% profit growth in the third-quarter and, get this… 59% growth in the final quarter of 2008. Let’s say I’m very… skeptical!

This is nothing new. Wall Street analysts are always behind the curve when it comes to a profit slowdown. They typically miss the timing of recessions (like the one we are probably in already), and it takes them forever to ratchet down these rosy estimates.

As the chart above shows, usually S&P 500 profits don’t bottom out until AFTER the recession is over before rebounding. Since the U.S. recession may have just started, I wouldn’t expect a big rebound in earnings anytime soon.

Now the Good News: Certain Sectors Have Strong Profit Prospects

As I mentioned yesterday (Will Floundering Financials Drag Down Overall Profits Again in '08?),  the financial sector of the S&P 500 is the root-cause of the current profit decline. Outside financials, the rest of corporate America’s profit picture looks pretty good.

In fact, if you eliminate all the dismal results from banks, brokers, insurers (and other financial firms) overall profits for the S&P 500 would have been UP close to 12% in the fourth quarter – rather than DOWN 24%.

A few other sectors including consumer discretionary and basic materials also show declining earning growth, but there are also several bright spots. The technology sector for example is expected to enjoy 20% profit growth in the first-quarter of 2008. And here, analysts have been raising estimates based on a positive outlook from tech firms. Telecom shares too should enjoy healthy profit growth this quarter.

This all goes back to my central investment theme for 2008: selectivity is the key going forward. You must tip-toe through the mine field of earnings disappointments to find the few stocks and sectors that will shine.

Will Floundering Financials Drag Down Overall Profits Again in '08?

Fourth quarter earnings for the S&P 500 Index companies are mostly in the books now, with 98% of companies reporting (as of Feb. 29th), and the results were downright dismal as expected.

The really interesting part of this story however is the quick rebound Wall Street analysts are projecting for this year – as if banks aren’t still writing-off billions in losses. While the financial sector led the hit-parade last quarter, the broad economy is being impacted by a slowdown now – it isn’t just the financial sector.

To be sure, financial sector results are at the bleeding-edge of reported losses. In fact, banks and brokers in the S&P 500 Financial Sector saw profits disappear in the fourth quarter with a 122% year over year plunge in earnings! The financial sector in aggregate reported losses of $2.10 per share – down from profits of $9.48 a share in the final period of 2006. That’s quite a negative reversal of fortune!

Since financial stocks account for nearly 20% of the S&P 500 by market-cap – the largest sector in the index by far – the gushing red ink in this sector was enough to drag overall S&P profits down minus-20% in the fourth quarter; ouch!

Financials however weren’t alone posting poor results at the end of 2007. Companies in the S&P Consumer Discretionary sector (construction, auto, retail) saw profits drop 10.5% last quarter.  Also, the S&P Basic Materials sector suffered a 12.2% profit decline.

Still, all other sectors of the S&P 500 Index, except for Utility shares, posted double-digit profit growth in the fourth quarter.

Information Technology shares led the way, posting stellar earnings growth of 29.6% in the three-months ended December. Energy and Health Care weren’t too far behind – with profit growth of 24.5% and 22.7% respectively.

This shows the dichotomy of the bruising bear-market we’re in. The subprime market shock that began last summer has been centered on housing and finance from the very beginning. Meanwhile, most other parts of the economy seem to be functioning pretty well – at least for now. The real question is: how much of a spillover effect will the weakest sectors have on the rest in 2008?

Tune in to my blog tomorrow for a rundown of expected earnings for the first quarter of 2008. These reports will begin to hit the fan in less than thirty-days from today. Stay tuned!

Life Finds a Way… in Global M&A

In the film Jurassic Pak, the visiting scientists are puzzled about how the dinosaurs in captivity (now free, roaming the island, and trying to eat said scientists) are able to reproduce since by design all the creatures on the island are female. Dr. Ian Malcolm, an expert in chaos theory, famously remarks: “life finds a way.”

The same thing is now happening in the global market for mergers and acquisitions (M&A). In spite of the world-wide credit crunch that has seized up financial markets, M&A deals are - finding a way – to get done.

In this case, the creatures on the prowl, and taking a lead role in funding corporate buyouts, are none other than Sovereign Wealth Funds in partnership with emerging market banks.

Previously, I have written about how Sovereign Wealth Funds (SWFs) are now big buyers of distressed equities. Wall Street banks have been a particular target of interest for SWF money. From the Middle East to China and Singapore, government-backed SWFs are spending big bucks investing in Citigroup, Merrill Lynch and Bear Stearns among other investments.

Global M&A activity came to a screeching halt last year as the sub-prime induced credit crunch worsened. Many buyout deals couldn’t get done, because big Wall Street banks couldn’t sell these leveraged loans to investors. Instead, big banks internationally got stuck with about $150 billion of leveraged buyout debt on their books.

But life in the M&A market finds a way…

Wall Street Suffers Tarnished Reputation as Deal Maker

SWFs, working in partnership with private equity firms and foreign banks, are filling the void left by big Wall Street banks by providing the financing needed to get buyout deals done. Banks in emerging markets have really stepped up to the plate to provide funding, after Wall Street struck-out.

Turkish banks for instance provided nearly $2 billion in senior debt for the $3.3 billion takeover of local retailer Migros. In Asia, Shinhan Bank financed a $3.2 billion acquisition of a Korean firm. According to a recent Financial Times article, “local banks, particularly in Korea, Taiwan, Malaysia and China, are differentiating themselves” from Wall Street banks, by offering cheaper financing terms and being more willing to lend to get M&A deals done.

This is an interesting reversal of fortune for Wall Street, once dominant in M&A financing, but not anymore. At the end of 2006 the world’s top 10 investment banks accounted for more that 80% of all the acquisition financing in emerging markets, according to the Financial Times. However, by the end of last year, Wall Street’s share of emerging market deals sunk to just over 40% -- the bulk of financing now being provided by banks or private equity firms closer to where the deals are getting done.

Winners and Losers’ in Global M&A

A couple of potential investment trends of interest come to mind here…

First, income statements at Wall Street banks, already suffering dearly from the subprime fiasco, are now loosing valuable offshore M&A business too. Meanwhile the world’s SWFs and emerging market banks are snatching this lucrative business for themselves, fattening their own profits. 

So for investors banking on a rebound in the financial sector: Wall Street banks may NOT be the stocks to bet on for a big bounce even though they have been beaten down the most. Wall Street has lost not only prestige, but also market share in global financial services to SWFs and emerging market banks.

That business won’t be so easy to get back. Meanwhile, private equity firms such as beaten-down Blackstone Group (BX) have stepped up to fill this void, by provide funding amid the credit crunch. These firms are perhaps better positioned to prosper long-term as global financial markets rebound.

In Blackstone’s case, the firm has another big ace up its sleeve – China’s SWF is a big strategic investor in this particular private equity firm – great credentials to carry when trying to win future M&A business in emerging markets – especially China!