THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"Banks are more dangerous than standing armies"---Thomas Jefferson
"Size matters"--Eve
Another volatile week, driven mostly by continued concern about a possible default on Greek debt. Why do we care? One reason is the lack of transparency as to who actually is "at risk" should Greece default on its bonds. Published accounts indicate that large French and German banks nominally own much of the debt, but it is likely that they and any other large holder also purchased credit default insurance, or swaps. This fact makes Greece "hauntingly similar" to the bankruptcy of Lehman Brothers, according to some commentators. If you recall, "the music stopped" after the collapse of Lehman and the market for subprime debt that it maintained, and the most significant player left without a "chair" was AIG which had sold billions of dollars of subprime credit insurance. Indeed, the US government pumped more than $120 billion dollars into AIG so that it could make good on that insurance and so that the credit markets, which have come to depend on swaps, would not collapse. Who is insuring the Greek debt, if anyone? The world of swaps and derivatives remains largely private and unregulated. I make no political statement here, I am just stating a fact. The impact on me, however, was felt this week. As loyal readers know, I have done very well with the exchange traded debt of the new AIG which trades under symbols AVF and AFF. Based upon a Lehman redux fear, these badboys took a nosedive midweek but recovered nicely by Friday. I did my due diligence and do not believe that the new AIG is significantly exposed to Greek debt. I came close to selling near Friday's close, but with encouraging news coming from Europe I held. I am going to reduce my exposure over time however.
It appears that international regulators will mandate that the banks deemed "too big to fail" (e.g. RBS, Citi, JPMorgan, Bank America, etc.) will need Tier 1 capital equal to 9.5% of assets compared with the usual 7%. What this means is that in the next few years, these mega banks will need to raise even more funds. The most likely means will be "contingent capital" trust preferreds. They are treated as debt until a bank runs short of capital at which time they automatically become equity. Because of this "contingent" aspect, the yield on these is usually high. Keep your eyes peeled.
Also, as loyal readers know, I own a variety of positons in the preferred stock of regional banks. These are small and recently stable instititions (Associated Bank, TCF, etc) and the preferreds pay good dividends. The daily volume in these however is very small. One such holding, Taylor Capital (TAYC-P), dropped like a rock this week when someone unloaded 70,000 shares into a market that usually sees 10,000 shares traded. It has made a comeback, but I re- learned a lesson. The size of the daily volume does make a difference in liquidity, and as you all know liquidity is one of my guiding principles. In the future, go big, or go home.
Speaking of Eve, she is missing---at least in China. The Financial Times reported this week that thanks to the mix of cultural preference (a son is a family's Social Security), the "one child rule" and ultrasound, the male/female ratio in China is 121/100. That equates to 10's of millions of forced bachelors. This correlates directly to the fact that riots and strikes in China (which are illegal) numbered over 180,000 last year, 493 per day. Have you been reading about the revolt currently under way in "Jeans City", China? Civil unrest in China will lead to a further slowdown in the Chinese domestic economy (read, housing and consumer purchases). This could have a catastrophic impact on commodities. That is why I am mostly out of that sector---except for oil of course. Oh, and do you think China might become more militarily aggressive? One of my readers scoffs at this notion. Read today's WSJ book review of "Unnatural Selection--The Consequences of a World Full of Men".
And the beat goes. on.
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