Wednesday, October 1, 2008

The World After Bailout- How to Profit from it

(This is an article in process. Not done yet but I am publishing it as work-in-progress to get some feedback, ideas from you too.)

Will Bailout pass or not?
Looks like on this Sunday, the answer was mostly Yes. Then on Monday, it became a NO as Congress voted against it. Today as Senate is a about to vote, it looks like a probable Yes. However what will happen when it is voted in Congress tomorrow (Thursday)? This uncertainty about bailout program has made US markets the most dramatic in recent history. Down 778 points on Monday and then up 500 points on Tuesday. Today, the recovered from a 200 point drop in DJI. Looks like what an investor makes in an year can be made by Day-traders and short-term traders in hours this week! Currently we are all focused very short term- will this Bill pass or not. I think it will pass in one form or another.
The important thing in my opinion is now for us to wake up, free ourselves from short-term uncertainty and to start thinking about ways to figure out if we can profit from it. Is there a way to take a bit (I guess a micro-bite LOL) of this 700 billion bail-out monster? Not sure but this has already reached a trillion dollars if FNM, FRE and AIG are included. Remember, money never vanishes- it just changes pockets. So I am trying to see if I can route some of the money into my pockets.

Current State of the Markets
Assuming the Bailout bill will pass, let us think about the world down the road- in an year or over next few years.
* I don't believe the liquidity in the economy has vanished. Money is still there; it is the lack of confidence that is killing the credit available.
* Current inventory of unsold homes- around 4.8 millions. National Median home price is 225k. Assuming 50k of loss per home (to accomodate higher priced markets like California) to a mortgage lender-- the total loss to lenders for currently unsold homes is around 200 billions. Spread it across two years- maybe it is 500 billions but the Bailout is running into a Trillion and banks have already written down 250 billions or so over last few months... There is some money left between what is happening and what is estimated

The World (and Markets) after the Bailout.

* Mark to Market losses-- are paper losses. The market for the problem securities is thinly traded- prices may not be fair representative of reality. Anyway currently write-offs are happening but don't get surprised if mark-to-market bring profits in an year or two.
* Markets always deviate too much from fair-value line. In bull market, they go up too much from reality and in bear, they go down too much too. This always gives nice opportunities to smart investors to buy cheap and sell expensive.
* Government Bailout- Government keeps current problems- 'bad' securities- will revive confidence among players. This should revive the trading in MBS and their derivatives. Once this market revives, bargain hunting should start in this troubled securities.
* Chase, Citi, BofA--- they are acquiring new customers/business in fire sells by other institutions. Their customer/business acquisition costs are rediculously low. On long-term models they will benefit from two folds- increased customer base and also from less competition in the market.
* Goldmon Sacks, ... Investment bankers and Wall-street big dogs who survive this tough time will benefit down the road from reduced competition.

No comments: