The biggest mistakes investors make in bear market is to believe in Analysts's story that " market has discounted the bad news" and that "Worse is behind us"
Whenever the major banks have reported huge losses, they also simultaneously reported that they would be raising capital (to the extent of losses reported) just to cushion the bad impact.
Often the reported news are misleading. Let us see the today's news in CBS marketwatch says
QUOTE
Citigroup's .... The most obvious target to raise capital and help investors would be the sale or spin off of Smith Barney, Citigroup's brokerage arm.
Also
Even Pandit's hedge fund required a bailout during the most recent quarter
UNQUOTE
Read them carefully. Selling some assets does not raise capital, but merely raises cash.
Two quarters ago, when the CITI reported massive loss for the first time, Abu Dhabi Investment Fund gave them US$ 9 Billion via Convertible Bonds carrying 11% interest.
Now, two quarters later, CITI has lost over $30 Billions. How much more it would raise the capital and who will lend them? Abu Dhabi said NO.
Mere announcement of raising capital is not enough. There is no follow up announcement that the "Capital was indeed raised and it was subscribed or oversubscribed by "n" number of times just as you see in Indian market.
When UBS reported massive loss of $9 Billion for the first time, Singapore Government extended $ 9 Billions with great fanfare. Soon thereafter, UBS reported additional losses of $25 billions with a promise to raise $ 20 Billions as capital. The stock went up because investors were lead to believe that worse is behind us,
Again, there was no follow up announcement whether they did or did not raise capital and if so how many times the issue was oversubscribed., There is "pin drop silence"
Also, Royal Bank of Scotland, Britain's second largest bank, reported massive loss, and cushioned the news that it would raise US$ 20 Billions to bolster its capital. Financial Times (FT)reported that "RBS rose as much as 4.9 percent after reports ..
LEX of FT commented that "RBS last reported a 4.5 per cent equity Tier 1 capital ratio .... this falls to roughly 4.0 per cent. If RBS then raised $20bn in a rights issue, its equity Tier 1 ratio would recover to 6.0 per cent.
If the bank's capital adequacy ratio falls below 6% it is presumed to be near bankruptcy.
Merrill also reported to have been exploring means to raise capital by $15 Billions
You can see that these are all "promises" , away from hard reality. There are no follow up confirmation that they in fact did raise the capital. Whoever raised earlier carried interest rate 7.5% to 11%.
Even Mr. Pandit, seen as savior of Citigroup, finds his own fund bankrupt (see the above news under Citigroup)
The total losses and expected capital raising comes to over $100 billions - who is going to lend them money? Why no investor's name come out?
In Hong Kong, a profitable company CNOC, leading Petroleum producer from China, found difficult to create investors interest when it tried to raise $ 10 Billions in spite of making billions of dollars of profit.
Then, how come these losing banks will raise $100 billions, 10 times the size of profitable CNOC.
I am looking at the facts, not the promises. Citigroup, Merrill Lynch, Lehman Brothers, Wacovia, Royal Bank of Scotland, even J P Morgan chase, UBS are all bankrupt.
Wait for some bank to really go bust officially. We are facing complete collapse of banking system. And when that happens, there will be no buyers in the market, and Investors will find themselves trapped with all doors closed.
In spite of rally, I still maintain that nothing has been discounted as yet. As per my estimate, the losses in the system is over $10 trillions. I am unfazed by some rallies.
I do not invest looking at others. My intellects says - Retain cash 100%. I never failed in my life following this line.
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