What is trading?

Trading is war. Trading is a war between buyers and sellers. In order to win the war (profit), as a trader, you must be able to determine who is winning or in control at any time. Trading is a combination of buying, holding, selling and waiting.

Holding is waiting while being long or short. It only takes a few seconds or minutes to buy/sell a currency. Most of your time trading is spent WAITING.
Learn to WAIT for the opportunity to appear. Sometimes the wait is short, sometimes long. LEARN TO WAIT. BE PATIENT.

If you miss your entry, learn to trust that you will get another chance. If you miss your exit, just take what you can and be happy.

To paraphrase the principles of Sun Tzu: “What you do determines whether you lose. What the market does determines whether you profit.”

Master the simple. Stay focused. That's all you need to profit in the market.

MAY ALL YOUR TRADES BE PROFITABLE.

Will the concept of the market or platform for unlisted securities work?

Thursday May 30, 2013

DETAILS of the workings of the market or platform for unlisted securities are finally out, but will such a concept work?

Critics are quick to point out that there are a few reasons why it won't: firstly, the unlisted market, or ULM in short, will likely have limited amount of trades, considering that it involves the trading of equity in smaller and early stage companies. For example, how many trades will a venture capitalist make in a company it is investing in? Probably once a year, and that too after a thorough due diligence.

(Only high net-worth individuals and institutions such as venture capitalists (VCs) are supposed to trade in the ULM.)

With the limited liquidity, how can the operator of the exchange earn sufficient trading fees, the argument goes.

Secondly, there's the concern that these early stage companies and their funders will prefer to continue life doing their deals in the way they had been doing them, which is in an offline, face-to-face way.

After all, funders like VCs will prefer to keep their investments private.

In addition, there are a number of parties who already play this so-called matching role, bringing companies to meet with VCs and angel investors. So, why the need for a new electronic platform for that?

To be noted is the fact that the Securities Commission (SC) is merely going to regulate this platform while it will be owned and run by a third party. The request for the proposal to build and run the platform has gone out. Hence, the party running the exchange will be left to figure out how to make it a profitable venture, and one of the first things they are likely to look at is whether the market will generate sufficient trading fees.

These points about the challenges are indeed valid. It is likely that these are part of the reasons why some unlisted markets have failed in other countries.

However, the plan presented by the SC is cognizant of these challenges. What the SC is proposing, though, entails a much bigger picture, the creation of an eco-system, or a “social corporate network” if you like.

The ULM presentation by the SC on its website says that the idea is to create an eco-system of players in the space of small and medium-sized companies, the service providers linked to them and all the various funding sources that seek to fund this type of ventures.

What this also means is that it is not solely about the trading of shares. For example, an idea or product could have been developed by a bunch of university students and their professor. But they've no idea how to market it. However, a marketing expert who has built successful brands in that space could be part of this ULM system. The two could find each other and a deal could be struck. That could be considered as a transaction as well.

And aside from the trading of shares, the ULM is also envisaged to be a trading platform for other company-related products and services such as intellectual property rights, junk bonds and interest schemes. It could also be the platform for socially responsible investments.

The plan also talks about making this platform robust and successful so that players from around the world would become members, either selling their services and ideas or bringing their funds to it.

The ideas sound great on paper, but lest we forget, another idea in the same vein had been conceptualised and executed in the past, but ran out of money and had to be rescued. I'm talking about Mesdaq or the Malaysian Exchange of Securities Dealing and Automated Quotation, which was eventually consumed by Bursa Malaysia.

Then again, when Mesdaq was launched, the world was a different place. Social media was at its nascent stage. There wasn't President Barack Obama and his Jumpstart Our Business Startups initiative. And the concept of crowdfunding didn't exist. Sceptics of the ULM should read up about these developments. They both point to this fact that the ULM is hitting the market at the right time.

News editor Risen Jayaseelan is happy to note that another advantage of the ULM is that it should increase the transparency of Government funding mechanisms in the country for SMEs and start-ups.

Find Quality Investments With ROIC

January 05 2011| by Ben McClure

 

Return on invested capital, or ROIC, is arguably one of the most reliable performance metrics for spotting quality investments. But in spite of its importance, the metric doesn't get the same level of interest and exposure as indicators like the P/E or ROE ratios. Admittedly, investors can't just pull ROIC straight off a financial document like they can with better known performance ratios; calculating ROIC requires a bit more work. But for those eager to learn just how much profit and, hence, true value a company is producing, calculating the ROIC is well worth the effort.

TUTORIAL: Fundamental Analysis
Important mainly for assessing companies in industries that invest a large amount of capital - such as oil and gas players, semiconductor chip companies and even food giants - ROIC is a telling gauge for comparing the relative profitability levels of companies. For many industrial sectors, ROIC is the preferred benchmark for comparing performance. In fact, if investors were forced to rely on a sole ratio (which we do not recommend), they would be best off choosing ROIC. (There are many indicators for ranking a corporation's success. Learn more in Measuring Company Efficiency.)

The Calculations
Defined as the cash rate of return on capital that a company has invested, ROIC shows how much cash is going out of a business in relation to how much is coming in. In an nutshell, ROIC is the measure of cash-on-cash yield and the effectiveness of the company's employment of capital. The formula looks like this:

ROIC = Net Operating Profits After Tax (NOPAT) / Invested Capital

At first glance, the formula looks simple. But in the complex financial statements published by companies, generating an accurate number from the formula can be trickier than it appears. To keep things simple, start with invested capital, the formula's denominator. Representing all the cash that investors have put into the company, invested capital is derived from the assets and liabilities portions of the balance sheet as follows:

Invested Capital = Total Assets less Cash - Short-Term Investments - Long-Term Investments - Non-Interest Bearing Current Liabilities

Now, investors turn to the income statement to determine the numerator, which is after-tax operating profits, or NOPAT. Sometimes NOPAT is the same as net income. For many companies, especially bigger ones, some net income comes from outside investments, in which case net income does not reflect the profitability of operating activities. Reported net income needs to be adjusted to represent operations more accurately. At the same time, the published net income figure also may include non-cash items that need to be added and subtracted from NOPAT to reflect true cash yield. For the purpose of showing all of a company's cash profits from the capital it invests, NOPAT is calculated as the following:

NOPAT = Reported Net Income - Investment and Interest Income - Tax Shield from Interest Expenses (effective tax rate x interest expense) + Goodwill Amortization + Non-Recurring Costs plus Interest Expenses + Tax Paid on Investments and Interest Income (effective tax rate x investment income)

Interpreting ROIC
If the final ROIC figure, which is expressed as a percentage, is greater than the company's working asset cost of capital, or WACC, the company is creating value for investors. The WACC represents the minimum rate of return (risk adjusted) at which a company produces value for its investors. Let's say a company produces a ROIC of 20% and has a cost of capital of 11%. That means the company has created nine cents of value for every dollar that it invests in capital. By contrast, if ROIC is less than WACC, the company is eroding value, and investors should be putting their money elsewhere. (To fully utilize any stock metric, you must know how to read an income statement. Learn what figures to consider when performing a profitability analysis, read Find Investment Quality In The Income Statement.)

The extent to which ROIC exceeds WACC provides an extremely powerful tool for choosing investments. The P/E ratio, on the other hand, does not tell investors whether the company is producing value or how much capital the company consumes to produce its earnings. ROIC, by contrast, provides all this valuable information and more.

Moreover, ROIC helps explain why companies trade at different P/E ratios. The market demonstrates this well. From 1999 to 2003, the S&P 500 average P/E ratio fell roughly from 25 to 15, so the S&P 500 was trading at a discount to its historical multiple - does that mean the S&P 500 was oversold? Some market watchers thought so, but ROIC-based analysis suggested otherwise. Although the P/E ratio diminished, there was also a proportional reduction in the market's ROIC. This makes a lot of sense: since 1999 companies had had a much harder time allocating capital to worthwhile projects.

Investors should look not only at the level of ROIC but also the trend. A falling ROIC can provide an early warning sign of a company's difficulty in choosing investment opportunities or coping with competitors. ROIC that is going up, meanwhile, strongly indicates that a company is pulling ahead of competitors or that its managers are more effectively allocating capital investments. (The return on capital employed (ROCE) is an often-overlooked financial ratio, but it's one that can accurately calculate corporate efficiency and profitability. Learn more in Spotting Profitability With ROCE.)

The Bottom LineROIC is a highly reliable instrument for measuring investment quality. It takes a bit of work, but, once investors start figuring out ROIC, they can begin to track company results annually and be better armed to spot quality companies before everyone else does. (Analyzing the profitability of companies is a fundamental investment skill, but it also pays to play the trends. Learn more on how to actively manage your portfolio with The Volatility Index: Reading Market Sentiment.)

Read more: http://www.investopedia.com/articles/fundamental/03/050603.asp#ixzz2BE63AI3i

Stock Traders Find Speed Pays, in Milliseconds

By Charles Duhigg (New York Times)

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets.

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense.

These systems are so fast they can outsmart or outrun other investors, humans and computers alike. And after growing in the shadows for years, they are generating lots of talk.

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

For most of Wall Street’s history, stock trading was fairly straightforward: buyers and sellers gathered on exchange floors and dickered until they struck a deal. Then, in 1998, the Securities and Exchange Commission authorized electronic exchanges to compete with marketplaces like the New York Stock Exchange. The intent was to open markets to anyone with a desktop computer and a fresh idea.

But as new marketplaces have emerged, PCs have been unable to compete with Wall Street’s computers. Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

High-frequency traders often confound other investors by issuing and then canceling orders almost simultaneously. Loopholes in market rules give high-speed investors an early glance at how others are trading. And their computers can essentially bully slower investors into giving up profits — and then disappear before anyone even knows they were there.

High-frequency traders also benefit from competition among the various exchanges, which pay small fees that are often collected by the biggest and most active traders — typically a quarter of a cent per share to whoever arrives first. Those small payments, spread over millions of shares, help high-speed investors profit simply by trading enormous numbers of shares, even if they buy or sell at a modest loss.

“It’s become a technological arms race, and what separates winners and losers is how fast they can move,” said Joseph M. Mecane of NYSE Euronext, which operates the New York Stock Exchange. “Markets need liquidity, and high-frequency traders provide opportunities for other investors to buy and sell.”

The rise of high-frequency trading helps explain why activity on the nation’s stock exchanges has exploded. Average daily volume has soared by 164 percent since 2005, according to data from NYSE. Although precise figures are elusive, stock exchanges say that a handful of high-frequency traders now account for a more than half of all trades. To understand this high-speed world, consider what happened when slow-moving traders went up against high-frequency robots earlier this month, and ended up handing spoils to lightning-fast computers.

It was July 15, and Intel, the computer chip giant, had reporting robust earnings the night before. Some investors, smelling opportunity, set out to buy shares in the semiconductor company Broadcom. (Their activities were described by an investor at a major Wall Street firm who spoke on the condition of anonymity to protect his job.) The slower traders faced a quandary: If they sought to buy a large number of shares at once, they would tip their hand and risk driving up Broadcom’s price. So, as is often the case on Wall Street, they divided their orders into dozens of small batches, hoping to cover their tracks. One second after the market opened, shares of Broadcom started changing hands at $26.20.

The slower traders began issuing buy orders. But rather than being shown to all potential sellers at the same time, some of those orders were most likely routed to a collection of high-frequency traders for just 30 milliseconds — 0.03 seconds — in what are known as flash orders. While markets are supposed to ensure transparency by showing orders to everyone simultaneously, a loophole in regulations allows marketplaces like Nasdaq to show traders some orders ahead of everyone else in exchange for a fee.

In less than half a second, high-frequency traders gained a valuable insight: the hunger for Broadcom was growing. Their computers began buying up Broadcom shares and then reselling them to the slower investors at higher prices. The overall price of Broadcom began to rise.

Soon, thousands of orders began flooding the markets as high-frequency software went into high gear. Automatic programs began issuing and canceling tiny orders within milliseconds to determine how much the slower traders were willing to pay. The high-frequency computers quickly determined that some investors’ upper limit was $26.40. The price shot to $26.39, and high-frequency programs began offering to sell hundreds of thousands of shares.

The result is that the slower-moving investors paid $1.4 million for about 56,000 shares, or $7,800 more than if they had been able to move as quickly as the high-frequency traders.

Multiply such trades across thousands of stocks a day, and the profits are substantial. High-frequency traders generated about $21 billion in profits last year, the Tabb Group, a research firm, estimates.

“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”

Buffett's $5B Goldman Investment Up $2B? Try $6B

By David Clayton

Reports in the media last week indicated that Berkshire Hathaway’s (BRK.A, BRK.B) warrants in Goldman Sachs (GS) now have a paper gain of more than $2 billion.

The difference between the strike price and the share value translates into a $2.19 billion paper profit for Berkshire.

But this approach is wrong. Depending on how it’s calculated, Berkshire’s paper profit at the close July 23 was at least $3.1 billion, and could be more than $6 billion.

The recent article fails in its analysis because the author simply multiplied the number of warrants Berkshire received by the difference between the current stock price and the strike price. This approach provides just part of the story, which is the value of the warrants if they were exercised today.

But it doesn’t reflect the current market value of the warrants, nor does it recognize the value of the warrants when the deal with Goldman Sachs was struck. It also doesn’t include any discussion of the change in value of the preferred shares Berkshire acquired.

On September 23, Berkshire announced the terms of a $5 billion investment in GS preferred equity and warrants. In the eight weeks after the deal was announced, GS common stock was down nearly 60%.

Amid the market chaos, Buffett critics loudly decried the GS and General Electric (GE) investments as mistakes. “So far,” Simon Maierhofer of ETFguide.com wrote on November 18, “Buffett has lost over $2 billion on the Goldman deal.”

This article, like the ones recently, incorrectly valued the investment, and dramatically so. This article failed because it didn’t recognize how good a deal this was for Berkshire from the start.

The Simple Valuation

The easiest way to place a value on the investment is to imagine that it was cashed out today. Here are the terms: for Berkshire’s $5 billion investment:

• Berkshire received perpetual cumulative preferred stock paying a $500 million annual dividend
• Berkshire received warrants to buy 43.48 million GS common shares at $115, exercisable at any time before October 2013
• GS can redeem the preferred stock at any time, and will pay Berkshire $500 million when it does so

If at the close July 23, GS redeemed Berkshire’s preferred shares, and if Berkshire had exercised its warrants, here’s where the accounting would have stood:

This, the most conservative estimate possible, says Berkshire’s return on this investment has been 62% in 10 months.

Of course, Goldman hasn’t redeemed the shares and Berkshire’s not about to cash out the warrants. And it’s necessary to dig deeper to really understand what Berkshire’s return on the preferreds has been.

Analyzing the Investment More Rigorously

The investment has two parts, preferred shares and warrants, and it’s necessary to analyze each part independently to get a full picture of how good or bad the investment is.

Valuing the Warrants

Many authors writing about the Berkshire investment fail to describe the importance of the warrants, all too often indicating that they are somehow less important than the preferred shares.

However, the warrants have the potential to be enormously profitable, and were integral to the deal; they allow Berkshire to benefit from common stock appreciation, while the preferred shares don’t.

"The preferred pays us the dividend, " Warren Buffett said recently on Fox Business. "The warrants are going to make us the money."

The potential to share in gains made this part of the investment very valuable on September 23.

The warrants are basically American-style call options, exercisable at any time before October 2013. While there is no standard method for valuing American-style call options, the Black-Scholes option pricing model is the industry standard for valuing European-style options. European-style options can be exercised only at expiration; since American-style options have greater flexibility in execution, they are more valuable.

The inputs to Black-Scholes and my methods for determining their values:

• The value of the underlying investment – the market price of GS
• Strike price of the option (Strike) – $115/share
• Time to expiration (Time) – at the outset, this was 5 years
• The current risk-free interest rate (IntR) – generally that of Treasury securities maturing at the same time the option expires; the value is based on the Treasury’s daily yield curve tables
• The dividend yield over the life of the option (Yield) – this was estimated using the trailing 12 months of dividends divided by the market price of GS common
• Volatility (Vol) – ideally, this will be the volatility of the underlying option over the option’s life; obviously, this can only be estimated. Since time-to-expiration of the warrants was 5 years, I used a volatility calculation based on the previous 5 years of daily price data. In the 10 months since the deal was struck, GS stock’s volatility has shot up; however, since I believe this to be a short-term disruption in the market, I have elected to use the September 23 volatility figure for all calculations. The result is that Black-Scholes values are lower than they would have been with a higher volatility figure.

Here’s what Black-Scholes says the warrants were worth at the close September 23:

Multiplying this by the 43.478 million warrants Berkshire received, the initial value of the warrants was $1.39 billion.

Valuing the Preferred Shares

We will never know what value the market would place on Berkshire’s preferred GS shares, since they will never be traded. However, we can make reasonable estimates based on the market prices of similar securities.

If there were exchange-traded cumulative preferred shares of GS, this would be a simple matter of assigning the yield of those shares to the Berkshire investment and backing out a market value (divide the $500 million dividend by the yield to return the market value).

However, all of the exchange-traded GS preferred series are non-cumulative. So estimating the value of Berkshire’s investment is a bit more complicated.

Preferred share values are primarily determined by two factors: market interest rates and risk, risk being the probability that the dividend won’t continue to be paid. Because Berkshire’s preferred shares are cumulative, the risk that the dividend won’t be paid is much different than for its non-cumulative preferreds; GS must pay the cumulative preferred’s dividend unless it goes bankrupt.

Therefore, the risk premium demanded by investors in cumulative preferreds is lower than that demanded by non-cumulative preferred investors, and yields are lower.

For example, there are both cumulative and non-cumulative exchange-traded preferred shares of JP Morgan (JPM). The non-cumulative always yields more than the cumulative; between September 5 and September 23, the non-cumulative averaged a 1.0% higher yield than the cumulative.

On March 6, at the market bottom, this spread had increased to 4.4%, reflecting the perception that JPM might at some point not pay the non-cumulative preferred dividend. Since April 1, this spread has ranged between 1.1% and 1.8%.

Another factor affecting the value of the preferred shares is their redemption rules. If the company can redeem the shares and end the investor’s revenue stream, the yield demanded will be slightly higher.

I don’t have a good sense of how large this impact is, and have increased my estimated market yield for the Berkshire shares by 0.2% across the board to account for this effect.

The table below shows September 23 data used to estimate the initial value of Berkshire’s preferred equity investment in Goldman Sachs, where:

• JPM PrI – J-series non-cumulative preferred
• JPM PrE-G – average of three series of cumulative preferred
• GS-PrD – the most liquid of GS non-cumulative preferred series
• GS-PrBRK – estimated yield if GS cumulative preferreds were traded

Dividing the $500 million annual dividend by the estimated yield gives the estimated value: $6.49 billion.

When the Deal Was Made

So, the market value of the $5 billion Berkshire Hathaway investment in Goldman Sachs on September 23 was $7.89 billion, or 58% more than the deal’s price.

This figure is so outsized that it begs for debunking. I invite critiques of method. Perhaps I got something wrong. But even if my calculations end up discredited, there are basic facts indicating that Berkshire significantly underpaid:

• The warrants have some value; the mere fact that they’re not being exercised demonstrates this. "Every instinct in my body," Buffett said, "tells me that we will want to hold those warrants until they're very close to their expiration date." And while Buffett has stated that Black-Scholes increasingly overstates the value of options as the time-to-expiration increases, 5 years isn’t so long that the calculation would be geometrically wrong. I’ve also used a somewhat conservative volatility figure.
• The yield on the preferred shares was far higher than what the market would have demanded. Remove the value of the warrants from the total investment to determine the yield on the preferreds: $5 billion less $1.39 billion is $3.61 billion. The $500 million dividend indicates that the yield on the equity investment was 13.9%. Let’s be very conservative and suppose the warrants were only worth $500 million when the deal was struck (preposterous, since they would have generated a $437 million gain if exercised that day). That would place the cost of the $500 million annual dividend at $4.5 billion, for an 11.1% yield. That’s 2.6% more than what GS non-cumulative preferreds – riskier investments – were yielding on the NYSE.

At the Bottom – November 20

On November 21, shares of GS hit their bottom of 47.14. At this moment, Black-Scholes says that the Berkshire warrants were worth $84 million, for a loss of $1.309 billion since the deal was announced:

The Berkshire preferred yield likely would have peaked at about 10.2%, based on the JPM data and the GS non-cumulative peak yield of 12.3%; this corresponds to a market value of about $5 billion.

So Simon Maierhofer of ETFguide.com was right - Berkshire had lost $2.904 billion. What he didn’t say is that at this point, at the very bottom, when GS common had lost 62% of its value, Berkshire’s investment was worth about $5.035 billion (including accrued dividends), pretty close to what it originally invested.

And had Goldman redeemed the shares then, Berkshire would have collected the $500 redemption premium.

Today

On July 23, GS closed at $165.45, up $40 in the 10 months since the deal was made. GS preferred shares are up close to 40%. And Berkshire’s investment has performed similarly. The warrants:

And the preferred shares:

Add in $404 million of accrued and collected dividends, and Berkshire’s investment is now worth $11.05 billion, not including the $500 million redemption premium GS must pay when it redeems the preferred shares.

The Bottom Line

When the deal was struck, Buffett purchased $7.89 billion of securities at a 37% discount. Ten months later, the investment had grown another 40%; the total return is more than 120% in ten months. Even using the most conservative valuation method, Berkshire’s return is $3.1 billion, or 62%.

During this period, gold has returned 5.7%. The S&P 500 lost 15.9%.

Suppose GS redeems the preferred for $5 billion on October 1. Berkshire will have received $500 million in dividends, or 13.9% of the investment less the initial value of the warrants. Further suppose that GS common stock appreciates by 8.6% per year through October 1, 2013, the warrants’ expiration date, regaining its 2007 high of 233 on that date. Berkshire would buy $10.13 billion worth of stock for $5 billion. That’s an annual return of 36.5%.

Naturally, the return on the warrants is tied to that of GS common. If the stock is stagnant at 165, the options will pay just $2.19 billion, or 11.4% per year. And if Goldman stock declines, the warrants would be worth less.

But if GS grows at 11.3%, as it did for the 7 year period starting 1/1/2000, Berkshire’s gain on the warrants would be $6.19 billion, for a 42.8% annual gain.

When properly valued, this investment certainly looks like it will go down in history as one of Warren Buffett’s greatest.

Difference between Hedge Fund & Private Equity

By Matthew Lynn

What's the difference between a hedge fund and a private-equity fund?

Easy. One speculates in bonds, stocks, currencies and commodities, using leverage and derivatives, while the other uses its own capital and borrowed money to buy companies, improve them, and then sell them on.

Well, not so fast. The evidence suggests that hedge funds and private-equity funds, the two hottest growth sectors of the financial universe for the past five years, are converging.

What seems to be emerging is a new type of alternative investment fund that shrugs aside traditional ideas of risk and seeks the highest returns any way it can.

Last week at a conference in Frankfurt, David Rubenstein, a co-founder of Carlyle Group, the world's third-biggest buyout firm, said private-equity and hedge funds may eventually converge. "Funds may be created that have the combined characteristics of private equity and hedge funds," Rubenstein said.

Carlyle, based in Washington, estimates that there are 9,000 hedge funds with investments worth about $1 trillion, while 3,000 private-equity funds have $150 billion in assets worldwide.

There is certainly no shortage of evidence of the two types of fund treading on each other's turf.

First, Carlyle itself has just announced plans to launch two hedge funds later this year. And New York-based Blackstone Group LP, which manages the world's biggest buyout fund, has already set up a hedge-fund unit, which oversees about $9 billion in assets. Meanwhile, Carl Icahn, a legendary Wall Street raider, is launching his own hedge fund.

$3.25 Billion Offer

Next, hedge funds are now acting more like buyout firms.

For example, Circuit City Stores Inc., the No. 2 electronics retailer, last month received a $3.25 billion takeover offer from Boston-based Highfields Capital Management LP, which manages hedge funds. Likewise, Beverly Enterprises Inc., a nursing-home chain, last month rejected a bid worth $1.41 billion from an investor group that included hedge fund Appaloosa Management LP.

Buying out whole companies because you think they are undervalued? That's the kind of work that used to be done by private-equity firms.

So how real is the convergence story?

Traditionally, hedge funds and private-equity firms have been seen as deadly rivals. They compete in two main ways.

They joust for talent. Any bright 20-something in the financial markets who wants to make a lot of money quickly (and that covers maybe 99 percent of them) faces a simple choice: work in hedge funds or in private equity. One of the tasks for both industries is to bring those people with their ideas on board.

'Alternative Investments'

And they compete for money. Most mainstream investors put the bulk of their capital into equities and bonds. They have a small amount allocated to a box marked "alternative investments" for which they are willing to accept higher risk for bigger returns. Both the hedge-fund and private-equity managers are chasing that same pool of footloose capital.

Yet the rivalry is rather like one of those fiercely contested local derbies between football teams from the same town. The competition is intense precisely because they are, in reality, playing on the same turf.

The two types of fund are now morphing into one another. Both have always, at root, been about the same thing: using financial engineering intelligently in the hope of generating returns higher than anything available from mainstream investments. Sometimes it works, and sometimes it doesn't. The plan is much the same.

20 Percent Fees

In time, hedge funds and private-equity firms may end up being the same thing. Some already are. Last month, the Financial Times reported that New York-based private-equity firm AEA Investors LLC plans to merge with Aetos Capital LLC, a real-estate and hedge-fund firm.

One of the key features of hedge funds is that they don't accept any artificial boundaries on their investments. If they see a profit, they pursue it. A hedge fund won't stop and say, "No, we can't do this because, even though it might make us some big bucks, that's not what hedge funds do." That would go against all their best instincts.

Meanwhile, for the private-equity guys, a hedge fund has a more flexible financial structure and more freedom in the kind of investments it makes. And it generates higher fees, which are typically 20 percent of any gains made. (Not that the private- equity firms were ever slouches at paying themselves.)

Three Trends

That's why we should expect to see three trends in the year ahead: more mergers between hedge and private-equity funds; more private-equity firms launching hedge funds; and more hedge funds acting like buyout funds. The result? A new breed of alternative investment, probably with the structure of a hedge fund, yet looks more like a buyout fund.

What's the risk profile of Mega-Hedge-Buyouts LLP? Don't even ask. No doubt, some regulators are already chewing their fingernails at the thought of the havoc that might be wreaked if one of them goes wrong.

Still, it will be a fun outfit to work for. And along the way a lot of smart people will make a lot of money.

Six Myths About Oil Speculators

By Rick Newman, U.S.News & World Report

So now we know who's really responsible for $4 gas. Finger-pointers from Washington, the International Monetary Fund, and even Saudi Arabia no longer seem to buy the idea that the demand for oil around the world is simply growing faster than the supply, driving prices to record highs close to $140 per barrel. There must be a more nefarious reason, it seems. So now entering this drama is a villain everybody can hate: The Evil Speculator.

At recent congressional hearings, politicians and energy experts argued that speculators have artificially added $30 or more to the cost of a barrel of oil, turned oil trading into a global poker game, and doubled the price of gasoline practically overnight.

But who are these party crashers? Where did they come from? How are they doing this? And who can stop them? We'd all like to see a superhero swoop in and smite the speculators, saving Gotham from the peril of $4 gas. The only problem is, speculators aren't quite the bogeymen that politicians want us to think--and they even play an important role in the oil markets and the global economy. Some major misconceptions:

Speculators are inherently bad for the economy. There's no doubt that speculators are out to make money, by buying a commodity like oil (or gold, or real estate) when they think the price is likely to rise and they'll be able to sell for a profit. But they also help sustain the market for buyers and sellers and provide ways for individuals and businesses to offset risks.

Many companies, for instance, want to lock in the price they're going to pay down the road for petroleum products and other supplies they need to run their businesses. So they make agreements with suppliers on a price they'll pay next year, or the year after, when they actually take possession of the oil. Buying and selling such "futures contracts" makes these companies speculators by definition, since they're placing a bet on the future price of oil.

Companies doing this kind of hedging include gasoline refiners, airlines, shipping companies, and others that spend a lot on fuel or petroleum. Often they use investment banks or other intermediaries to arrange the deals. They might be gambling, but this kind of speculation actually helps companies run their businesses more smoothly, and if they guess right on future prices, it may give them a competitive advantage against other companies that don't plan as prudently.

There's a Speculator Star Chamber somewhere. Global markets are so abstruse to ordinary folks that it's easy to imagine a cabal of evil geniuses pulling the levers from some fortified complex in London or Geneva. But that's the Hollywood version. "The market is so competitive that that's nonsense," says Bob Hodrick, a finance professor at Columbia Business School. "There's no way for everyone to communicate and get together and say, 'We're going to buy and drive the price up.' " There are thousands of investors around the world placing bets every day on whether oil prices will go up or down--and they have no way of knowing who their fellow speculators are. All they know is the current price, shown on a computer monitor, plus whatever their own research tells them.

Speculators are super-rich market manipulators. Certainly some are super-rich, including investors in sovereign wealth funds from Middle Eastern and Asian nations. But new data show that many oil speculators these days may be big pension and index funds that invest on behalf of ordinary working Americans. These huge investment funds have typically invested in equities, but in recent years they've been adding commodities--including oil--to their portfolios as a way to diversify.

Even if the commodity portion of these portfolios is just 3 or 4 percent, that can trigger big swings in the oil markets, where most investors up till now have been smaller players. "There's no malice or manipulation here," says Ed Krapels, an analyst with the research firm Energy Security Analysis. But the entry of such big institutional investors into the oil market could definitely contribute to rising prices, especially since they tend to buy and hold securities like futures contracts, instead of quickly selling--which contributes to scarcity and rising prices.

The government tracks speculators and knows who they are. Part of the reason nobody's really sure what effect speculators have on the oil markets is a lack of information. Exchanges like the New York Mercantile Exchange track the activities of their members, but even then, a trader could be a speculator one day, buying oil or futures contracts, and a seller the next day: Nobody checks a "speculator" box when making a trade.

A recent study by the federal Commodity Futures Trading Commission, which regulates commodities markets, found a big increase in the percentage of speculators buying oil contracts for investment purposes--"paper barrels"--instead of buying because they need the oil. But oil markets are less regulated than markets for stocks or bonds, and there's still a lot that's unknown. Congress has ordered more studies, with new regulation likely as well.

Speculators are creating a huge bubble in oil. We've just seen a bubble pop in the housing market, with home values now plummeting. And before that, the tech bubble inflated, then burst. But the run-up in oil prices is probably different. The housing boom was generated by cheap and, in some cases, fraudulent mortgages, not by a huge increase in the number of people who needed housing. The tech boom was similar to old-fashioned manias, where investors raced in hoping to cash in on a gold rush and bid the price of technology shares way above their inherent value.

But in the oil markets, there is in fact growing demand because of strong Asian economies. And supply is fairly fixed for now, since adding more oil to the market means finding new sources and spending billions to extract it, not just opening a spigot a little wider. "There are pretty strong fundamentals behind this run-up," says Sarah Emerson, another analyst at Energy Security Analysis. Speculators may be pushing oil prices somewhat higher than they would otherwise be--but a bust similar to housing or tech stocks seems unlikely.

Speculators should be banned. Few, if any, economists or energy analysts advocate this. In fact, some fairly modest regulatory changes could bring greater transparency to oil markets and force them to operate more like stock and bond markets. Buying a contract for oil futures, for instance, typically requires the buyer to put down less than 10 percent of the value of the contract; the rest can be borrowed. That allows buyers to roll up big stakes with relatively little cash. Raising the "margin requirement" to 50 percent, the usual threshold for stocks, would cool demand for oil futures, while still keeping the speculators in business. And maybe get the witch hunters off their case.

Jim Rogers - Hot Commodities

If anyone has any doubts over recent spike of crude oil price to the all-time high of over USD139 per barrel, read this book. Written by no other than the commodities guru Jim Rogers himself.

His insight is purely based on the supply and demand of the world crude oil reserve and reasons why we should invest our money in commodities, especially in crude oil. According to him, no major elephant oil fields have been discovered over these years in the world. This is coupled with huge energy demand from China and the rest of the world.

According to him, if the world is experiencing recession or economy downturn, or bear market in equity, it always coincide with the commodities bull market. He believes there could still another 10 years or more for the bull in the commodities market.

Jim Rogers also reasons why we should invest directly in commodities itself and not the company that link to the underlying commodities in order to get a better returns.

Sometimes I wonder whether the recent sharp increase in the crude oil price is due to the speculators and fund managers who take Jim Rogers advice and hedge their investment in crude oil futures.

Believe this guy. He knows what he is talking about.

你不知道的賺錢秘密

猶太人對全球金融市場、金融體系、金融政策、金融操作的影響力，是令人難以想像的驚人與龐大……

你知道股神華倫‧巴菲特、投機大師索羅斯、Bloomberg 創辦人彭博、聯儲局前後任主席格林斯潘、伯南克、美國前後任財長桑默斯、魯賓、保爾森，這些人有甚麼共同特點嗎？

他們都是極為成功的金融巨擘，他們都是猶太人！

事實上，不少投資銀行的創辦人也都是猶太人，眾所週知的所羅門兄弟（Salomon Brothers）、高盛（Goldman Sachs）、雷曼兄弟（Lehman Brothers）、JP Morgan摩根、摩根士丹利（Morgan Stanley）都是猶太人所創辦，而且都是從猶太家族企業起家的。

而至今在全球金融重鎮華爾街，也有高達50%的金融菁英是猶太人，像是高盛知名的多頭總司令艾比柯恩（Abby Cohen）、花旗的衛爾（Sanford Weill）等人，都是猶太人。

猶太人對全球金融市場、金融體系、金融政策、金融操作的影響力，是令人難以想像的驚人與龐大！

高度決定視野、視野決定命運，如果不懂猶太民族，不懂猶太文化，那你很難在現代這個金融體系中，獲得多了不起的成功！因為當前的全球金融體系，就算稱為猶太金融帝國也不為過！只要猶太大亨打個噴嚏，全球金融界和銀行界就得重感冒！

猶太人到底多有錢？

根據富比士的統計，美國前40大富豪中，有45%是猶太人；全美國有三份之一的百萬富翁是猶太人。但全美僅有590萬猶太人，佔全美近3億人口中不到2%。

事實上，猶太民族在全世界算是少數民族，全球目前僅有1300萬猶太人，大約比台灣總人口的一半多一點而已，然而這些猶太人卻掌握全球主要金融金脈！

為甚麼猶太人這麼會賺錢？為甚麼世上有這麼多在金融領域取得相當成功的人都是猶太人？為甚麼猶太人可以掌握全球金融脈動？而想要在金融市場取得成功的人，又該如何學習猶太智慧？甚是創造出超越猶太智慧的地位？

為甚麼猶太人特別會賺錢

為甚麼猶太人特別會賺錢？是猶太人比較聰明嗎？數學能力比較好嗎？講到聰明與數學，全世界對於華人跟印度人的聰明與數學也都有相當程度的認同。這二種人在矽谷，在資訊科技業界也都有一定的影響力跟成就，然而，卻不是在金融業！為甚麼同樣都是聰明才智有目共睹的華人或印度人，卻沒有猶太人在金融領域中出色？顯然想要在金融領域成功，光是聰明是不夠的。

視學習為終生目的

猶太金融帝國得以如此龐大驚人的3大秘訣在於：

1. 智慧才是終生財富

全世界有二個民族都非常重視教育，也以數字能力優秀見長，一個是華人，另一個就是猶太人。

華人鼓勵教育、學習，但是華人的學習是工具，是手段，不是目的，讀書、學習只是作為金榜題名、出人頭地的手段與工具。一旦達不到目的，就變成：百無一用是書生。

但猶太人同樣崇尚教育，文化精神卻大不相同。猶太人把學習當作終生目的。在猶太文化中，學者的地位是很高的，而猶太文化也深信，良好的教育自然會帶來財富，終生的學習與智慧則是人生真正的大財富，別人怎樣也不能偷不能搶。

如果你問猶太人，人生最重要的是甚麼？猶太人的答案一定是智慧。

智慧來自猶太人的宗教傳統，在猶太人的心中，佔有舉足輕重的地位。猶太人不斷地受到迫害，富貴浮雲、房子財產都可能如曇花一現，因此猶太文化不斷教育後代，唯有智慧可以伴隨終生，可以幫助後人度過任何困難與挑戰，而有了智慧，財富自然也就隨之而來。

有個猶太人的經典故事如下：

猶太母親問孩子：“如果有一天，你房子被燒、財產被搶光，你要帶什麼東西逃跑？＂

一個孩子回答：“錢。”

另一個孩子說：“鑽石。”

猶太母親笑著說：“孩子。你們要帶走的不是錢，也不是鑽石，而是智慧。智慧是任何人都搶不走的，只要你還活著，智慧就永遠跟著你，無論如何，你都不會失去它。只有智慧，能夠幫你度過所有的難關。”

智慧的觀念就這樣深深紮根在猶太人的心中。

學者遠比富翁偉大

在猶太人文化中，學者遠比富翁偉大。猶太人把僅有知識而沒有智慧的人，比喻為“背著很多書本的驢子”。

猶太人崇尚創新，認為沒有創新的學習只是一種模仿，學習應該以思考為基礎，懷疑是開啟智慧大門的鑰匙。

猶太人喜歡思考宏觀的、深度的問題，喜歡抽象與邏輯，人類歷史上學術地位相當有成就的人物如科學家愛因斯坦、思想家馬克思和列寧等人，也都是猶太人。

星洲日報／投資廣場‧2008.05.26

學習猶太人險中致富

猶太人的經典《塔木德》，充滿了他們的生活及賺錢哲學；而《你沒讀過的塔木德商場聖經：和猶太人一起擁抱財富》就是一本以《塔木德》內容為藍本的財富管理著作。

近期股市之凶險，令人望而生畏，但在世上最有錢的民族─猶太人眼中，有風險才會有利潤，只要認為是值得的，便應該去冒險。

有風險才有希望

《塔木德》這部口傳的典籍，記錄了猶太人生活、宗教、處世、道德上的準則。當中提到：“兩頭狼由‘一個方向’來襲，羊倌不能視為不可抵抗，但由‘兩個方向’來襲，就可以視為不可抵抗嗎？”

我們都會碰到狼，數目可能是一頭、兩頭，或是更多的狼，問題是我們如何看待這些狼。

成功的商人在窮途末路，總會遷徒至夠生存的地方。更重要的是，他們能夠以處變不驚的態度去面對風險，並把賺錢的慾望化為行動。

冒險≠賭博

在猶太人眼中，冒險是勇敢與常識的結合，並不是賭博。

聰明的冒險者必須瞭解可能性和對能夠承受的損失一笑置之。而當猶太人發現風險難以抵禦時，就會尋找相對低風險的出路。

苦難換來豐碩成果

猶太人除了勻於面對風險之外，亦能樂觀地面羚苦難。他們認為只有嘗盡苦難和貧窮的人，才能在商場上有所作為，從而取得豐碩的成果。以下兩個故事，可讓大家明白他們的樂觀心境。

故事1：馬會飛上天

空古時有個叫哈比的猶太人，因惹怒了國王而被判死刑。這個人向國王求饒說：“只要給我一年時間，我就能使您心愛的馬兒飛上天空。如果過了一年，您的馬不能在天空自在地飛翔，那麼我被處以死刑，亦不會有半句怨言。”國王感到好奇，於是答應了他。

哈比回到牢房時力一位囚犯對他說：“簡直是異想天開，馬怎會飛到天上去呢？”哈比笑著回答說：“在這一年內，也許國王會死、也許我自己會病死、也許那匹馬出了意外送了命。總之，在這一年內甚麼事情都有可能發生，也許在這一年時間內，馬兒真的飛上天空呢！”

故事2：驢狗送命救主人

有一位猶太人拉比（老師）帶著一盞燈、一頭驢和一條狗去探望一位百里之外的朋友。夜幕低垂，猶太拉比在樹林旁邊看到一間閒置的倉庫，便決定在那兒留宿。半夜時分，風吹滅了油燈，老虎吃掉了他的狗，獅子吃掉了他的驢子，可是他當時仍在夢中，未知道身邊發生的一切。

第二天清晨，當他知道自己的驢子和狗慘遭不測後，便慌張地跑去附近的一個村莊。然而眼前所見，村莊裡血流成河，屍橫遍野。原來昨夜有一幫盜匪進了村子，搶劫財物兼大肆殺戮。

猶太拉比想到，昨天晚上如果犬吠、驢叫、燈明驚動了劫匪，自己恐怕亦難逃一劫。是狗和驢用自己的死，換取了主人的性命。是一盞燈用自己的黑暗，讓主人看到了第二天的太陽。於是猶太人悟出：看似最糟糕的事情往往會讓人進入佳境，所以人應活在希望中，不把苦難和貧窮視為壞事，更不可在苦難和貧窮中沉淪。

《塔木德》是甚麼？

猶太人可說是世上最有錢的民族。其人口僅佔世界人口的400份之一，但在最有錢的企業家之中，猶太人便佔了一半。他們的部份成功秘密，記載於《塔木德》（Talmud）之中。

書名：《你沒讀過的塔木德商場聖經：和猶太人一起擁抱財富》
作者：譚地洲、李越
出版社：漢湘文化

星洲日報／財富廣場／財富教室‧2008.05.10

Maintain Outperform on Dialog

(http://www.theedgedaily.com)

RHB Research expects Dialog Group Bhd to experience significant organic earnings growth in FY09 to FY10 due to the global advanced catalyst handling expansion to the US and Europe, and the company’s Tanjung Langsat Port tankage project.

The research house has raised its earnings per share (EPS) forecasts for Dialog by 8.5% for FY08 and 3.2% for FY09, factoring in better-than-expected recovery in margins.

It said Dialog’s 3QFY08 net profit of RM22.3 million was above its expectations, driven by growth contributions from engineering, procurement, construction and commissioning (EPCC) contracts plus growing profit from the advanced catalyst handling business.

Dialog’s overall net profit of RM59.2 million for the nine months accounted for 82% of RHB Research’s full-year forecast.

“Profit margins continued to improve, since the jump in 1QFY08, indicating that staff costs are not rising faster than profits (which was an issue between 2QFY07 and 4QFY07 as the company went on an aggressive hiring programme for its new businesses), and revenue mix has improved due to contribution from higher-margin businesses including catalyst handling,” it said.

The research house said Dialog was still beefing up its technical staff from the current 1,200 for its catalyst handling and tankage businesses, implying potential further increase in staff costs in FY09 to FY10.

RHB Research, however, said the impact would be mitigated as greater profit starts to flow in from these businesses.

On the company’s contracts, the research house said the Sabah Oil and Gas Terminal (SOGT) project that was still pending could potentially be more lucrative than the RM1.6 billion Sabah Sarawak Gas Pipeline that the Dialog consortium was awarded, given its expertise in building tank terminals.

Maintaining its outperform recommendation on the stock at RM1.52 with a new sum-of-parts fair value of RM2.36, it advocated a longer-term position on the counter, given FY10 price earnings ratio (PER) drops sharply to 9.5 times on 66% 3-year EPS compound annual growth rate (CAGR).

“Dialog is conservatively run, has an asset-light business strategy and proven long-term earnings track record,” it said.

“With only four years to go to the 2012 US$100 million (RM325 million) revenue target for the advanced catalyst handling business, there is potential for earnings disappointment. In addition, Dialog’s drilling fluids business is subject to drilling activity and thus to the crude oil price,” it said.

Meanwhile, OSK Research maintained its buy recommendation on Dialog with a target price of RM2.35, and said the counter remained one of its top picks in the oil and gas sector.

“(The) catalyst that we are looking forward to is the materialisation of another tank terminal either overseas or for the Tg Langsat land. Our target price has already factored in the additional value from the third tank farm. Its catalyst handling business is also expected to creep up to US$100 million by 2012 from less than US$15 million currently,” it said.

The research house said Dialog’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin continued to improve, reaching 10.8% versus 9.8% in the preceding quarter.

“This was largely attributed to the better margin from the Malaysian operations. Margins for overseas dropped slightly, and we think this may have been due to some start-up costs arising from overseas acquisitions,” it said.

OSK Research said revenue and profits for the Malaysian operations grew 131% and 360% year-on-year, driven mainly by more EPCC contribution from the construction jobs such as the RM600 million Tg Langsat tank terminals.

“Current EPCC order book stands at RM1.4 billion. Going forward, we see business from all segments including EPCC and catalyst handling to grow, particularly when the construction for Sabah Sarawak Gas Pipeline project kicks off.”

“As for the SOGT project, Dialog is also one of the front runners. The project is estimated to worth close to RM2 billion. The award of contract is likely to be announced towards the end of this year due to delays in the announcements of some fabrication contracts by Petronas year-to-date,” it said.

At the close of yesterday’s trading, Dialog rose four sen to RM1.56.

The Return of Gordon Gekko

The sequel to the 1987 film "Wall Street" is on its way, tentatively called "Money Never Sleeps". Personally, I think it should be renamed "The Return of Gordon Gekko" instead -- to capture the popularity of the character played by Michael Douglas.

But what I would like to do is make the following case; very few of the actions which Bud Fox (played by Charlie Sheen) and Gordon Gekko carried out and traded on were actually illegal under securities law at the time. In fact, any sequel to this film should have started with the premise that Gordon Gekko was acquitted on all charges of securities fraud.

Securities law has been materially tightened since the 1980s. I'm judging Gekko against the general principles which operated during that period rather than specific post-Boesky rules. And, Gekko was presumably charged with both securities fraud and tax fraud in the film; since Oliver Stone doesn't show us any material details of his tax arrangements, I can't comment on whether he was guilty on these counts.

All in, the charges against Gordon Gekko would be grouped into six general areas.

1. Trading in BlueStar Airlines (first operation). This is the firm where Bud Fox's father (Carl) works. Carl has become aware, as the union representative, that the FAA is about to rule in BlueStar's favour in a safety case, which will open up a few big routes to them. Bud Fox passes on the information to Gekko, who orders twenty thousand shares.

Potential charge: Insider dealing. Gekko is trading on the information provided via Bud Fox's dad. This is material and non-public information, and it would probably be illegal to trade based on it today. However, under the standards prevailing in 1987, "inside information" has to be "information coming from an insider", and an "insider" used to be defined quite narrowly; it would not have been at all clear that Carl Fox was an insider for securities law purposes. In any case, Bud Fox is certainly not a BlueStar insider; although Gekko actually finds out that his dad is a union rep, he would not therefore have been assumed to have known he was dealing on inside information. Given that at least two people (the comptroller and Carl Fox) have already blabbed about this decision, he would be within his rights to assume that, despite Bud Fox telling him it was incredibly secret, it was actually common knowledge in aviation circles. This charge would never stick.

2. Trading in Anacott Steel. Gekko tells Bud Fox to come up with some more hot tips. He suggests that looking into the activities of Sir Larry Wildman would be a good source. Bud follows Wildman about for a day, then finds out that he has boarded a plane bound for Erie, Pennsylvania (the headquarters of Anacott). Bud passes the information to Gekko, who sees a chance to greenmail his old rival. He instructs Bud to buy substantial block of the stock, then to call the Wall Street Chronicle with the codephrase "Blue Horseshoe loves Anacott Steel".

Potential charges: Insider dealing, market manipulation. Frankly, I don’t see how the insider dealing charge could ever have got off the ground on this one. It is not illegal to follow somebody into an elevator, and it is not illegal to ask their chauffeur where they are flying to. And that is all that Bud does with respect to Larry Wildman. They work out that his target is Anacott by an act of deduction from his aircraft's destination, which is public knowledge (in the sense that anyone who was in the right place at the right time could have got it; if you see a train crash, you do not have to wait until it appears on the evening news before selling the stock of the railway company). Insider information has to be specific information, and the fact that a man has flown to a town is not specific. This is the deal at which the film marks the beginning of the corruption of Bud Fox, and it is, as far as I can tell, completely honest.

The market manipulation charge is a bit more dubious. I must say that I don't like the way in which Gekko handles his relationship with the media, and I suspect that he would be caught today under the rules brought in to deal with "pump and dump" stock manipulations. But rules were significantly more lax in the 1980s, and people did indeed feed tips to the WSJ's "Heard on the Street" column about the dealings of big investors. And note that there is no false information here; Blue Horseshoe is the name of Gekko's trading company, and at the time Bud calls in the tip, it was substantially long the shares of Anacott Steel. It's a gray area, but I suspect that it would have been dealt with via an SEC disciplinary arrangement rather than a criminal charge. The actual greenmail which annoys Larry Wildman so much is not a criminal offence and never has been. It's just not against the law to buy something that you think other people will pay you a lot of money for.

3. Trading in Fairchild Foods and Roarker Electronics. It's not clear quite what goes on here, but it seems to me that Bud bribes the owner of a cleaning service to get a job which allows him to wander round the offices of his college friend Roger's law firm at night. He basically xeroxes documents relating to forthcoming mergers and acquisitions and uses the information to trade on behalf of Gekko.

Potential charges: Conspiracy to theft, insider dealing. Bud Fox has clearly gone way over his head here and is guilty of burglary and securities fraud. But how much of it can be pinned on Gekko? Not much, I'd say. Gekko calls Bud from his beach-house and says "You done good, but you gotta keep doing good. I showed you how the game works, now school’s out […] You don't understand. I want to be surprised …astonish me, sport, new info, don't care where or how you get it, just get it […] This is your wake-up call. Go to work". In the context of the film, it's clear what he means, but I think you would have a very hard time indeed in court proving that Gekko meant "Commit numerous counts of felony burglary" when he said "don't care where or how you get it, just get it".

Gekko clearly appears to be structuring his affairs in order to reduce the appearance of a paper trail linking him to Bud Fox; he asks Fox to trade through a number of nominee accounts, and to act with limited power of attorney over the money he manages. But in the absence of any non-circumstantial evidence, there are a million and one reasons why he might do this. Indeed, Gekko might say that he specifically arranged his affairs this way in order to bring home to Fox that he alone would bear the consequences of any illegality, in order to ensure that he didn't break the law. The point at work here is that Bud Fox is never an employee of Gordon Gekko (he keeps his job at the brokerage throughout the film), and so Gekko has next to no duty of supervision.

4. Conduct surrounding the tender offer for Teldar Paper. This is the centerpiece of the film, where Gekko makes the "Greed is Good" speech. Teldar is a paper company that Gekko regards as poorly managed, and he wants to take it over to break it up.

Potential charges: None? Corporate raiding is not illegal, and Gekko is perfectly within his rights to buy a lot of stock in a company if he thinks he can run it better than the incumbent management. Gekko was buying stock in Teldar before he ever met Bud Fox, and by the time of the meeting, he is the largest single stockholder. Teldar paper is "leveraged up to the hilt like some piss-poor Latin American country", but this can't possibly be Gekko's fault; he isn't in charge of it at the time of the shareholders' meeting. Oliver Stone clearly put this scene in the film in order to point out that most of what Gekko does which he considers harmful, he does within the bounds of the law (this is also true of Ivan Boesky, the financier upon whom Gekko appears to be loosely based. Boesky was sent to jail on relatively minor insider dealing charges, but his real fortune and reputation was based on perfectly legal, if sometimes spectacularly ill-advised, junk bond issues).

5. Trading in BlueStar Airlines (second operation). Gekko decides to take over BlueStar in order to carry out a similar breakup. He uses Bud as his intermediary, in order to ensure that he will have co-operation from the unions for doing so. In the course of the negotiations, he makes a number of promises; he claims that he wants to turn the company around with Bud as President (why the company is in need of a turnaround is not clear; I thought that the FAA decision was meant to mean that it was all systems go for BlueStar). Bud later learns that Gekko has no intention of keeping these promises; he simply intends to raid the pension fund and then break up the company. As Gekko buys stock, Bud and the unions announce that they no longer stand by the informal commitments they have given, and the price plummets. This allows Larry Wildman to step in and take the company away from Gekko.

Potential charges: Insider trading, market manipulation, breach of takeover regulations. Again, Bud Fox is the villain here, and he has been scandalously unprofessional in his treatment of Gordon Gekko as a client. It is not against the law to carry out due diligence on an acquisition you are thinking of making, and that includes talking to union representatives. The only price-sensitive information Gekko has is his own intention to make a bid, and that is privileged information; it can't be inside information by definition. What is highly illegal is for someone like Bud Fox to take that information to a third party (like Wildman), and having received it from what he explicitly knows to be a privileged source, for Wildman to act on it. I have no idea why Wildman is not indicted toward the end of the film; he has clearly been responsible for creating a false market in this stock in order to get it at a lower price (particularly, Bud encourages Gekko to part with a block at $17 when he knows that Wildman intends to tender $18; this is about as blatant as fraud gets).

I note that it is usually not illegal for the acquirer of a company with an overfunded pension fund to buy "minimum annuities" for the fund members and pocket the surplus, although this issue is academic as Gekko never gained control of BlueStar. Of course, these days, the likelihood of finding a US regional airline which still had an overfunded defined benefit pension plan to plunder would be pretty low.

6. Trading in Fulham Oil, Brent Resources and Geo Dynamics. These are the companies that Gekko mentions to Bud shortly before punching him on the nose. They aren't mentioned anywhere else in the film. But given the context, I have no reason to believe that anyone could make a charge stick on these companies either.

So that's basically the plot of the film. Gordon Gekko, an aggressive but perfectly legal financier, makes a mistake in hiring a thoroughly dishonest stockbroker to act for him, is made the victim of a scandalous securities fraud and then, for unknown reasons, is indicted along with the person who defrauded him, while the main conspirator in that fraud walks free. It's a travesty of justice.

Keep in mind that I did not condone what Gordon Gekko has done in the film. The points I just mentioned are just to clear a way for Gordon Gekko to start afresh in the new sequel.

More Volatility Post Election

By Richard Lin

Now that the 12th General Election is finally over and a new political landscape has been shaped, it is timely to discuss the possible implications on the economy and financial markets.

Inevitably, some of these political changes will cause disruptions in the economy as selective infrastructure projects and public expenditures announced earlier but which have yet to commence, may be under scrutiny. Surely, the newly appointed chief ministers will reassess the economic viability of certain projects and the awarding of contracts. Hence, several mega projects announced in the state of Selangor and Penang could potentially be delayed. These could involve projects such as water related infrastructure contracts, monorails, bridges, roads and others.

However, on a more positive note, Malaysians could be less burdened by high tariffs if these projects are efficiently planned and executed.

Apart from construction and infrastructure companies, gaming companies will also be affected. The numbers forecast operators particularly Berjaya Sports Toto, Tanjong and Magnum will have to relocate their premises from Kedah now that PAS is on board.

Property players may be affected too, as unapproved property projects and land acquisitions, could also be reviewed.

Sectors seeking for higher tariffs such as cement, steel, water and electricity could be negatively affected while toll hikes may also be tougher to implement, especially since the opposition parties have politicised the issue in the recent elections.

It should be noted that Selangor and Penang both contribute roughly 30% of the country’s GDP and a slowdown in economic activities in these states would affect national economic growth.

As it turned out, Bursa went limit down and triggered the Circuit Breaker when the Composite Index plunged 10% on Monday following the elections. The collapse of the market was compounded by sell-offs of equities by foreign portfolio managers who perceived there could be some political uncertainties arising from the outcome of the election. If this perception becomes a fact, Malaysia may suffer the same fate as Thailand and trade at a wide discount compared with the region.

On Monday, the market was also negatively affected by plantation stocks, which were also sold down viciously due to the sharp correction of CPO and other commodity prices over the weekend. To top it all, regional sentiment was also extremely weak that day with some markets down 2 to 4% due to renewed concerns over the US.

The Malaysian market is now subject to more volatility as foreign equity bourses are expected to remain turbulent while domestic politics may also affect sentiment.

The most notable event that could affect market sentiment would be the forthcoming UMNO general assembly. The market is eagerly awaiting the appointment of Cabinet members, mentris besar and the revamp of MCA, Gerakan and MIC.

As mentioned earlier, equity investors generally do not like political uncertainties, changes in policies and disruptions in economic activities, which could lead to downgrades in earnings. If these domestic issues are not resolved, it could be an overhanging factor clouding the market.

The situation in the US is looking more precarious. The Fed is desperately trying to boost liquidity to ease the strains in credit markets and foster the functioning of the financial system. This is extremely crucial as the US could plunge into a recession if consumption is crimped by the banks’ reluctance and inability to provide credit to consumers. Consumption accounts for two third of the US economy and the US accounts for 30% of world economy. This basically implies that consumption in the US accounts for 20% of the global economy.

The Fed will continue to cut rates but this tactical move will not resolve the credit issues overhanging the financial system in the US. Moreover, latest statistics are suggesting more job losses, which will impact disposable income.

Generally, I am still cautious of the equity market. I believe investors should be patient and wait until the outlook is brighter. I don’t see any compelling reasons why investors should weight up equities now when domestic politics could plague and disrupt economic activities. It should be noted that oil prices have surged to all-time high while the US is heading for a recession. Global inflation will also spike up due to the surge in commodity prices. Why should one rush to invest in equities?


Richard Lin Kwok Wing is the Executive Director / Chief Executive Officer of HLG Asset Management Sdn Bhd.

U.S. Recession - The Inevitable

Well, the Fed had cut the fed fund rate by 125 basis points to 3.00 in just two weeks. This could slow the decline of U.S. equity market for now. But, could the Fed save the U.S. economy from the inevitable? Personally, i don't think so.

Look at the Baltic Dry Index (BDI) -- the leading indicator of the economy, it has dropped from 11,000 points in Nov 2007 to just over 6,000 points in Feb 2008! Container rate has crashed! Furthermore, ISM services had contracted to 44.6, almost touching the level of recession. Last quarter GDP only grew at 0.6%, terribly close to zero. These are all signs of U.S. economy is heading towards recession, which many people have already believed it had. If this is the case, George Soros prophecy could become true -- the worst recession in 60 years!

So, what to do at this time of uncertainty? Of course, the defensive measure is to liquidate all your position in equity market and remain in the sideline. For aggressive investors or traders alike, continue to short U.S. stocks on strength, particularly financial related counters by using instruments like options and CFD. Because this could be the worst credit crunch in the making.

The Fed may cut the fed fund rate further in the next meeting, but the room to cut further may have to stop one day because of the continuing weakening of U.S. dollar which put pressure on the price level in the country, particularly many goods have to be imported from China and the rest of the world. If the fed make a wrong move, it could steer the world largest economy to stagflation instead of helping it prevent a recession.

Interestingly, every time the U.S. stock market plunges, the global stock markets plunge even more. Until now, there is only a 13% decline from the peak of around 14,000 points for the Dow Jones Industrial Average, whereas the other major stock markets had certainly plummeted more than that, some even more than 20%, a threshold for entering a bear market.

So my friends, the worst is yet to come for U.S. stock market. Not even a new president could prevent the inevitable. Just be prepared!

This is the good time to trade options & CFD

The world financial markets continue to plunge because of the rising probability of U.S. recession. Of course, if you only trade conventional equity in stock market, you may wonder -- are there still any opportunities to make money in the stock market right now? Well, what i can tell you is - if you are still trading conventional stock market, whether it's the US, Europe, Japan, or Asian markets, the probability of losing money is greater than ever. Of course you can still gain. But with the effort and time required, the stress of monitoring a downtrend market is not worth it at all.

You may say, we could short-selling the stocks. But don't forget, you need to pay daily interest for that. So, the best strategy these days in this volatile market is of course trading options. In particular put options where you gain a great deal when the market is plunging. The more it plunges, the more you gain. Added in the volatility, you could gain much more than you could expect.

For short term, the sure fire strategy is continue to buy put options on all the financial stocks in the US market, selective technology stocks and retail stocks. ISM index as the leading indicator early this month had already shown 47.70, it's already in the contraction level. If it does not show any improvements early next month, the financial stocks could plunge much more because of the rising concern of US recession.

In a mature market, you must be able to make money whether market is up or down. So, at this point, the best instrument available is of course options. Another good alternative is Contract for Difference (CFD), where you could also profit from falling market. See my previous article on CFD.

There are two advantages of trading CFD over options. One is the guaranteed stop loss which you can place on all trade, provided it is available from your CFD provider. Another advantage is the money is only allocated to trade CFD, not committed like in options. For instance, let say you have USD1000 to trade. If you buy options, let say you buy USD800 worth of options, unless you sell it, if not you only have USD200 available for your next trade. But not in CFD, let say you place a trade worth USD800 with a guaranteed stop loss at USD720, you still have USD720 + USD200 = USD920 confidently available for your next trade. This is the power of CFD trading combined with guaranteed stop loss. Of course, the disadvantage is it don't have volatility counted in like in options, where you could gain a bit more in both call or put options if there is huge volatility.