Ref: 07/208 Date: 09-11-2007 Original Post
Title: Get out of Brokerage stocks and major stock financing banks
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The market is going to take a stiff turn for the worse. On Thursday, the market was down at one time 285 points but rebounded in small volumes in USA – but the most important thing was that the market clocked one of the heaviest turn over in several years in US market. Possible Reason: - Smart investors have run out for EXIT selling and dumping high quality liquid stocks to take out all serious money they can.
When US$ is slumping, the tech stocks, being export oriented, benefit. However, NASDQ bore the brunt of the selling, meaning that large and smart investors were selling everything, regardless of beneficial effect of slumping dollar, on the premise – sell first and ask questions later.
Today, another bad news struck – Barclays Bank, one of the most venerable banks from UK, reportedly lost GBP 10 Billions or US$ 21 Billions. Brokers like Goldman Sach, Morgan Stanley, and Merrill Lynch have found their debt being closer to possible default, if credit swaps were any guide. The most invisible and dangerous fallible giants are JP Morgan Chase (with over USD 30 Trillion exposure in derivatives) and GE Capital. They are champions of derivatives.
What we are witnessing now, is the complete melt down of derivatives. For the last 2 years, Spots are ruling the Future markets whereas all previous years derivatives were the dominants.
World’s biggest derivative players are all major banks like Citibank, JP Morgan Chase (who is known to be shorter of commodity currencies like ZAR (South African Rand) and Silver, UBS, Deutsche Bank, BNP, Credit Lyon’s, Goldman Sach, Morgan Stanley, Merrill Lynch, Barclays, HSBC (reportedly largest short seller of silver), GE Capital and major insurance companies who have parked their money in these derivatives such as AIG. Swiss Re, General Re, and some large German houses.
It is not the question of “whether” but when? That "when" is only days away.
It is time one gets out of brokerages and stock leverage financiers because they will be so much hit and hardest below the belt, that some may even disappear. Lots of NPA will result now, and there could be several suicides and shoot outs at major financial centers, including Mumbai.
Brokerages however large have no physical assets which can be relied on for recovery. Their assets are only its Sales People who will suffer deepest depression, and others like Computer terminals have no real value at all. These brokers are used to taking large proprietary positions in bull market, and they are so close to the market that they are unable to see the extra ordinary risk they have taken, many of their leveraged customers may fail and disappear.
The largest stock financing banks like UTI, ICICI Bank, HDFC Bank, Kotak and others will find major defaults of their customers. These banks’ major profit growth is out of interest earned on stock financing, and when the stock collapses, their earnings as well as capital will disappear. They will be selling lots of margin stocks if their customers do not pay up. ICICI is most vulnerable.
Of late, the investors have become complacent – last few falls and rapid recovery immediately 2 or 3 times, have convinced them that any major fall is their buying opportunity. Read everywhere, including money control, where headlines are – Corrections are buy opportunity.
The money is disappearing very fast in sub-prime related losses. It was a trillion dollar market, and derivatives have made them 20 times bigger. Any losses in overseas market will invite margin calls to those investors, and very first thing they will do is to sell down their emerging market portfolio like Brazil, India and China.
Do not be under impression that money will flow from NYSE/NASDQ to NSE/BSE. There is no money – just disappeared. Optimism under these circumstances will be fatal.
Kalidas, Hong Kong
9-Nov-2007
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