Friday, February 20, 2009

Technical never wrong but not always…

DOW surprised most of technical indicators, because of double dipping within 3 months span. The last November’s low (~7500 and S & P ~750) was considered as low of this bear market but now again DOW down for second time. Historical perspective now this recession/depression is compared with 1873 great-great depression. But history for just reference point we can’t take it as is. As everybody knows we are going through an unprecedented tough time of our life time.

Investor’s usually ignore main street’s money spending, stimulus plans, mortgage relief’s, they are very curious about how this government going to fix credit market. So far no body from new Mr. Obama’s administration detailed out some robust plan to fix credit markets other than some stress test.  May be they are still brainstorming how to’s and other matters. But investor’s point of view they want to hear a solid plan from new administration. One message from lawmakers is, if stress test failed on a bank, then the bank would be a candidate of nationalization, which creates panic among major bank’s stock holders.

DOW’s 7300-7500 is the low for this bear market. Why we are very confident about it? Still investors has money and money waiting in sidelines to come into wall street, the high run of Gold price is great example of investor’s confidence about investing. But obviously they are looking for a super duper safe investing. The saving rate increase, gold price increase are the signs of early recovery period as per top economists. But now DOW index is down further to 7365 and may go down up to 7200. But the point to remember is Bank of America, Citibank and JPMC are the component of DOW and they are now new eye of this hurricane. So we don’t need to look into DOW index for time being.

So this is good time to investing into stocks. The answer is yes, if we are looking for a long term investment option then it is a golden time but for short term it is not a good market, still there are lot of “grey area” especially credit market. The initial indications from new administration is not so encouraging because they are also still don’t know how to fix it, until everybody clear with how to fix the credit market, we can see unstable market here in U.S and all over world, hence investors keep on invest in gold, bonds and some safe havens.


Friday, February 13, 2009

Recession: Why this severe?

As per basic of investments, if person A lost x amount of money, person B gained the same x amount. The money stays in economy, and person B might reinvest the money for some other purpose, this is called money rotation (my own lay-man term). What happened now is, people lost money on real estate and no body else gained it, the money just evaporated. Lending institute is the one dodging the bullet by writing down bad loans. One question may arise why lending institute is selling at low price now, and can they wait some more time to sell it higher price? But holding a foreclosed asset is high expense than selling it 20-25% price down.

A rough estimation is, an average lending institute holds 90% of home loan value on foreclosed houses. 1 million houses were already foreclosed and almost 6 million will be foreclose with in next year. On each house for sake of argument say lending institute losing $100k, so that equal to 7,000,000 X 100,000 = 700,000,000,000/-, which itself is $700 Billion. So far government gave about $165 Billion as bail out money, which may not enough to cover even legal fees which lending institute accrued over foreclosed houses. So we can’t expect them to loan more to public right now.

The so called money rotation is just frozen to small industries, car loans, student loans and all kinds of loan, so now we are going through a non money flow time as a result catastrophically job loss and severe recession. This is exactly happen in Japan from 1990 to 1999, they had unrecoverable prolong recession for almost a decade and economy again rebounded after digital, plasma TV inventions. But U.S.A is not a Japan, they are the largest consumers and producers in world, U.S.A’s GDP is 13 Trillion and world can’t afford to prolong recession in U.S.A. 

We have to make smart decisions now, yesterday’s Microsoft’s decision to open a retail shops across America is smart one like wise we need to some top tier companies have to spend some money for wise investments. McDonald already planned to open more stores are the best examples of smart decisions at this recession time. This is good time of making long term investments, many millionaires came out of this kind of market. This with government tax cut, spending make economy flourishes again by this year end.

I end my recession series here…

Happy Valentine’s Day…


Thursday, February 12, 2009

What went wrong?

There are so many blame game swirls around here about who is responsible for this recession? Each recession is unique and we can’t blame some particular industry or group of people or a single entity for failure. This recession is really a combination of many things, it is very hard to pin point why and what went wrong? But we can concentrate on who lost most from this recession.
  • Developed nation’s unemployment rate should not go above 5%, but now U.S.A unemployment rate is 7.6% and some places unemployment rate is above 10%, which is unacceptable.
  • As usual, undocumented workers and some legal immigrates are more affected in terms of jobs and they were returned or forced to return to their home country, which is unrecoverable. As per Chicago Tribune report, there are some 367K undocumented workers forced to return and volunteer return may be close to 1 million.
  • As of legal immigrates, most of them are degree holders returned to their home country and joined various local companies. For example, IBM laid off some 4,000 people and offered them a job in Argentina, Brazil, China, Czech Republic, Hungary, India, Mexico, Poland, Romania, Slovakia, Slovenia, South Africa, Turkey, and United Arab Emirates. Good for those emerging markets, they need more talent people, and recession is good time for them to get good resource. It is same as last recession.

Most of media blaming people’s greedy for this mess. But I don’t agree with them because we are at capitalist era and making more and more money without breaking any law and buying more stuffs are basic for capitalist. There is no limit for the money and commericalism, all of us at least want to buy or explore the following

  • Decent home at prime location.
  • Send kids to good school and any Ivy League college.
  • Benz/BMW cars.
  • Hawaii trip .
  • High end 150 inch plasma TV.
  • Home theater.
  • $5000 super bowl game.
  • Gold and diamond watch, jewelry.
  • Fun trip to Las Vegas/Disney world.
  • Europe/Asia/world tour.
  • Cruise from Florida to Norway.
  • Last but not the least donation to charity.
We are progressively developing and there is no end of is, again this is fundamental of capitalism. The whole economy is moving because of this spending and our eagerness/greediness to explore, experience new technology and world.

But how soon we want to do all is matters. For example, if we want to buy a 150 inch plasma TV for $10,000, A) spend 5-6 months to save at least $5,000 and get credit for remaining $5,000 B) buy it as soon as possible get all by credit. The first (A) way is wise one, we are utilizing our future money at same time spending some from our own saving. We have to decide when we want to go world tour, at the age of 25 or 45. If we go at 45 we can spend some money from our saving and get some credit if necessary.

It is all depends on our decision making. I think lack of clear decision making is the main reason for this recession, starting from individuals to financial industry to Wall Street to Main Street.


Wednesday, February 11, 2009

U.S Stimulus Package

Finally a balanced version of stimulus package going to approved by lawmakers from both the houses. The final version is very balance, 35% in forms of tax cut and remaining 65% towards spending, mainly construction. My first wish list, redo all Chicago area roads, too many pot holes, too large also. The hope is as soon as this Stimulus becomes law, Caterpillar Inc would rescind most of 22,000 layoff which announced recently. This will be applying to all over country, some companies want to rehire some layoff people as soon as this becomes law, most of the spending towards rebuilding and most of 3.6 Million layoffs were from construction, manufacturing industry. They can easily find a job from this spending. First time home buyers are getting almost 15% tax credit, definitely it is going to help real estate also. Here is a chart of job losses from this recession, just compare with previous one, it is mother of all recession so far, and 3-4 months ago it looked like another 2001 recession, but still they are close. This is why we need a stimulus as soon as possible.

 Source :

One of my personal wish list also included in this stimulus, that is, digitalize all medical records to reduce paper work. When i started my career in U.S at Silicon Valley the start up Neoforma had an ambitious goal to support healthcare industry to reduce paperwork. So we know how much paper work involved in health care industry. We successfully helped healthcare industry from fax based ordering system to online that was a revolution at that time. I’m glad that i found an excellent article from 2001 archive CNN Money regarding this matter.

The stimulus package is huge and massive in size, i wonder how come Mr. Obama’s team gets assembled this much detailed package very soon and introduced in both the chambers. The green initiatives are great and it increases awareness of saving energy all over country and even world. But we need an innovation based projects also, which are lacking here, anyway innovation always come from private sector not necessary from government.

Here are highlights of this massive Stimulus package, please note it is not from final version.

  • $32 billion Funding for "smart electricity grid" to reduce waste
  • $20 billion  Renewable energy tax cuts and a tax credit for research and development on energy-related work, and a multiyear extension of renewable energy production tax credit

Smart electricity grid is much needed infrastructure change now. Energy related work is definitely helps to lower oil consumptions. 

  • $6 billion High-speed Internet access for rural and underserved areas.

Good for Web 2.0 startups.

  • $32 billion Transportation projects
  • $31 billion  Construction and repair of federal buildings and other public infrastructure
  • $19 billion Water projects
  • $10 billion Rail and mass transit projects

 I think we need more rail and mass transit projects. 


Tuesday, February 10, 2009

Recession/0.5 Depression 2008-09: Explained in my words

In software engineering, we have “trail and error” to fix an issue, we don’t know the solution for a problem but merely provide a code change and hoping that would fix the issue. If not, then try again. We are in same mode for current recession also. Mr. Obama’s stimulus package definitely going to help economy to flourish but how long. It was very unfortunate that world leaders not coming together to fix the fundamental financial architecture break down.

We have to first understand what caused this issue.

  1. Joe planning to buy a house in San Jose, CA.
  2. He walks into a bank for a loan at value of $800,000/.
  3. Bank determines that Joe has some issue with credit history hence he will not eligible for prime rate.
  4. Even though Bank gives mortgage loan to Joe at sub prime rate @ 3.5 Adjustable Rate Mortgage.
  5. Bank then sells this mortgage to big investment firms like Lehman Bros, Bear Sterns etc.
  6. This investment firms bundle up all this loans and sells all over world. This is called Mortgage backed securities (MBS). 
  7. Among investors, MBS are safe heaven bet, since it backed by a real asset and historically house price never went down other than great depression period.
  8. So technically Joe bought his home with John’s investment from Russia, and Gupta bought a home at Delhi with George’s investment from Chicago.
  9. When one buy a MBS he/she thinks that he is investing to a real estate, low risk, high return on investment etc. No body never ever thought that we are moving towards 1930 great depression days.
  10. At same time investment firms bought insurance for this high risk mortgages.

Now who is accountable for mortgage that Joe got it from Bank, the mortgage was sold and it is not under Bank’s radar and investment firm’s radar, some one across the border holding it. The actors are loosely coupled here and Joe is single point of failure. The well proven business flow was just reused for sub prime market without any research and analysis.

These MBS was backed by credit default swaps (CDS) which is insurance like contracts to cover bonds in case of defaults. Usually CDS covers only very low risk bonds such as municipal bonds, government bonds etc, but again due to the confidence about real estate, CDS started covering MBS also. Unfortunately CDS is not regulated, hence it can be traded in secondary market, it is like today XYZ hedge fund holding contract and tomorrow it can be ABC hedge fund. The price for CDS determine based on investor’s confidence about outcomes. 

So now the stage set for Banks and investment firms, what all bank need to do is give mortgage loan to Joes, Johns and sell it to investment firms and investment firms buy a insurance from AIG and convert mortgage into MBS and sell it to open world market. MBS was now held by some one in earth, AIG now convert these insurance into CDS and was held by some hedge fund, nothing was regulated because CDS mainly traded at various places like London, Berlin and New York, we don’t have a global policy to control it.

This is how we do real estate business for 15-20 years it was greatly worked and smoothly integrated. What went wrong now is mainly, easy money flow and uncontrollable global economy. What we need is greater global co-ordination and greater technology to forecast risk and mitigate it.


Wednesday, February 04, 2009

Social Web 2.0 and privacy, data issues

Whether we like it or not, next big wave of technology space is Web 2.0 (for 2.0 addicts, it is time to explore Web 3.0) and cloud computing. For small start up firms cloud computing is huge cost saving and more importantly time saving. There are two level of security issue arise from Web 2.0 A) Privacy Issue : Use of web 2.0 social sites like blogging, micro blogging, Face Books etc B) Data issue : Data transfer between this sites and cloud providers. First we will look into details of use of social media and its privacy issues.                  

First time when e-Commerence becomes reality, the same security/privacy become an issue, but now it is a non issue, in fact buying from Amazon is very safe than giving a credit card to a real person for check out. Now social media, we are facing a new level privacy issue, which is not necessary an identity theft, but our own footprint may be revealing us.  Our life should be an open book, before some one wants to make connect or hire us they have all rights to know about our interests, dislikes, strength, and weakness. Now this point of time, no one willing to hire any body if she/he doesn’t has a decent online history, at-least a Linkedin profile. Social Medias are saving a huge money and time for employers, potential business partners and even life partners.

Social Medias are great to demonstrate our own strengths, at same time we expose our weakness also, which is balanced, nobody has time now to listen or read our 1 hour lecture or 10 pages resume, more over those can not be validated. The point is rather than fearing or the name of protecting our privacy, not utilizing Social Medias is a big time mistake. What to write, what to avoid is each one’s self judgment, definitely we are not going to write our social security number, mother’s maiden name, home address, salary etc.  But it is true that what ever we write may be taken as in wrong context but it is unavoidable because most of the times what ever we say also misunderstood, it is all depends on who is reading/listening and their IQ level.

For example, if i write “my wife is lazy when i ask something in favor when i watch football” The context is funny, passive-aggressive, the core is most of the wives doesn’t like husband watching all the time some sports, what if some one interrupt that wife = woman so women are lazy, my writing is against women and i’m male chauvinist. We can ignore those claims, we didn’t violate any law or morale here.

The real danger is kids and teen’s exposure to online but believe me we can’t stop these net generations from touching computer, all we have to do is provide some mechanism to prevent our kid’s information ends with wrong persons. My advice is we have to constantly watch our kids Face book, My Space profiles and how they are interacting with others, may be we can be in their friend list so that we can see all updates and their friend list. Now Social Media has matured, they constantly removing some convict and offenders profiles and more scrutiny towards each profile.