Standard & Poor’s On The Dock: Accountability For Credit Rating Agencies?

Will the United States Department of Justice finally proceeding to sue the credit rating agency Standard & Poor’s finally bring accountability to the largely unregulated credit rating agencies?

By: Ringo Bones

With the United States Department of Justice finally proceeding to sue the credit rating agency Standard & Poor’s for misleading investors by its overly-rosy assessment of mortgage back securities – an action that lead to the global subprime mortgage crisis of 2008, many in the financial world are finally breathing a sigh of relief that those credit rating agencies with their rather arcane way of assessing the credit worthiness of complex financial instruments will finally be held into account. Given that such credit rating agencies will finally be held into account after operating devoid of any semblance of corporate social responsibility since the days of the Ronald Reagan presidency, will this finally spell the cleanup of Wall Street?

Given that credit rating agencies are only doing self-fulfilling prophecies of credit worthiness of the credit instruments issued by financial institutions that issued such instruments because the financial institution themselves are the very ones paying the credit rating agencies to assess the very credit instruments they are issuing, the U.S. Department of Justice’s civil lawsuit against the credit ratings agency Standard & Poor’s seems well-substantiated given that S&P’s shenanigans of issuing its top “Triple-A” ratings to rather toxic financial products less than a year before the housing bubble and the subprime mortgage crisis spread around the world. Sadly, many investors were duped because Standard & Poor’s seems to be the only one of its kind qualified to assess the credit worthiness of almost everything from complex financial instruments, financial institutions and even the credit worthiness of other sovereign countries.

Citigroup and Wells Fargo have already been sued by the U.S. Department of Justice for such financial shenanigans that lead to the housing and subprime mortgage bubble of the past five years. With a case that relates to the overtly-rosy rating of subprime mortgage backed securities, other countries affected by the subprime mortgage crisis are planning to sue Standard & Poor’s too. 

Cats In New Zealand: Not Economically Viable?

After a prominent New Zealand economist label them as “natural born killers” and therefore a liability, are cats no longer economically viable in New Zealand?

By: Ringo Bones

Unless scientifically verifiable evidence to the contrary emerges, cats had been introduced by the first white European settlers in an otherwise cat-free land of what is now New Zealand about couple of centuries ago.  During their tenure, cats had lead to the extinction of 9 native bird species in New Zealand and have pushed other native fauna to the brink of extinction thus therefore are seen from an ecological perspective as an invasive species in New Zealand. But will a draconian measure of a prominent New Zealand economist of spaying and neutering cats and not replacing the ones left to allow them to gradually go extinct in New Zealand even be an “economically viable” option?

The rather draconian cat ban by Gareth Morgan, a prominent New Zealand economist who is now labeled as the “anti-kitty economist” by his detractors proposes that by spaying and neutering stray cats and even cats with owners and allowing them to gradually die out is the most economically viable way to solve the native wildlife extinction problem in his country. Given that the New Zealand government had set aside large tracks of the country as a protected nature preserve and those outside the country have seen these via last series of movies by Peter Jackson – i.e. The Lord of the Rings trilogy and The Hobbit – is economist Gareth Morgan’s plan for a “cat extermination” the most economically viable way to solve New Zealand’s native species extinction problem? After all, tenured ecologists have since pointed out the three main threats to native wildlife all over the world are pollution, climate change due to excessive greenhouse gasses in the atmosphere causing global warming and an over encroaching human population into ecologically sensitive areas.

According to Bob Kerridge, president of the Royal New Zealand Society for the Prevention of Cruelty to Animals says economist Gareth Morgan’s proposal is too cruel for New Zealand’s feline pets – economic viability or not. Even though being a prominent economist is not yet an elected position in New Zealand, Gareth Morgan could well kiss his future in New Zealand politics goodbye because cat lovers and cat owners in New Zealand won’t be voting him into public office anytime soon. 

Facebook: Lucrative Undervalued Stock Du Jour?

Even though its stock price had been heading south since its initial offering back in May 2012, is Facebook stock now overdue for a “Bullish” rally?

By: Ringo Bones

With Facebook CEO Mark Zuckerberg adding a Graph Search feature to his famed social network site, it seems that Facebook would have already made some very enthusiastic friends in the more conservative Wall Street circles, but unfortunately it didn’t. With such “temporary” setback, is Facebook now overdue for a Bullish rally of its stock price? After all, business actuaries have valued it at 100 billion US dollars – making the famed social network more valuable than Bank of America or McDonalds.

Unfortunately, even if it is being sold as a lucrative “online advertisement engine”, conservative Wall Street types had never been convinced by the rather “unsubstantiated” valuation of Facebook. Thus its stock price, despite after the lockup period expired back in November 2012 is still going south of its May 2012 IPO price, but will it rise again someday? After all, it has already over 1 billion users.

There are a number of reasons why Facebook’s stock price could eventually rise in the future. First, Facebook is now getting 23% of its revenue from mobile smart-phone users which also forms the bulk of its advertising revenue, and then its revenue jumped 40% to 1.6 billion US dollars during the last quarter / October to December 2012 period. But despite such good news, Facebook share prices fell again after the recent announcement of its last-quarter earnings for 2012.

Primary because of the 80% profit fall to just 64 million US dollars and the most important factor is that the somewhat conservative outlook of the Wall Street Ivory Tower is still not convinced on Facebook’s 100-billion US dollar net worth. Will Facebook stock prices eventually rise someday? I'm not holding my breath. 

Silver: Safe Haven Investment of Choice for 2013?

Despite being relegated as the “poorer cousin of gold”, is silver now poised to become one the safe haven investments of choice for the year 2013?

By: Ringo Bones

As one of the top four precious metals – along with gold, palladium and platinum - that are traded on a per troy ounce that appear on the world market’s commodities tick , silver is on average 55 times cheaper than gold. And yet silver has been steadily rising in value – along with gold – since we have been hit by the global credit crunch back in 2008.

Even though this is a rare period in history where gold is now “slightly” more expensive than platinum despite gold being 1,000-times more plentiful than platinum on the Earth’s crust, platinum rose in value by 10% back in 2012. And not to be left behind, silver managed to rise in value by as much as 8% back in 2012 too, so does this mean that silver is now poised to be the safe haven investment of choice for 2013 for those wanting to have a more diversified safe haven investment portfolio?

Back in January 8, 2013, Gregor Gregersen, chief executive of Silver Bullion in Hong Kong says that during the first week of 2013, there has been a sharp increase of purchases of silver bullion and numismatic quality silver coins from his silver retail outfit and if trends continue, silver’s value could rise by as much as 500% during the next three years. And silver is still currently used to back the value of paper currencies in the banking systems of both the United States and The People’s Republic of China.

Despite the film-based sliver nitrate and silver halide based chemicals used in old-school “analog” film based photography being replaced by digital photography almost overnight that virtually relegated film-based photography to the technological dustbin of history, silver is still used for ultra-low electrical resistance traces on printed circuit boards and electrical connectors of today’s latest digital cameras. Looks like silver could well become the next safe haven investment of choice for those willing to diversify their own safe haven investment portfolio.

The Fiscal Cliff Deal: Politics Over Economics?

As the “feverish bullish” market rally now seems to peter out, is the short-term Fiscal Cliff Deal nothing more than dysfunctional politics trumping over economic common sense?

By: Ringo Bones

Well, at least America’s economically embattled middle-class wasn’t thrown under the bus this time around and as for “Dictator of the House” Boehner supposedly getting his well-deserved defenestration off the Fiscal Cliff would have to wait another time, many economically savvy individuals now wonder if the short-term Fiscal Cliff Deal nothing more than “kicking the can down the road”. The next insurmountable hurdle facing an increasingly partisan Capitol Hill will be the Debt Ceiling and the U.S. Republican Party’s push for very unreasonable Federal spending cuts (aimed at primarily Democrat-legislated programs?) by March 2013. Will this two issues spook the markets yet again?

The short-term deal that staved off the looming Fiscal Deal that House Republicans played brinkmanship until the last second did manage to generate a post-New Year market euphoria back in Wednesday, January 2, 2013 seems now starting to inevitably peter-out as wary investors around the world start to wonder whether a partisan “deadlock” of the Debt Ceiling and Federal Spending Cuts Deal that needs to be deliberated by March 2013 will spook the markets yet again. Given that President Obama won’t do a repeat of the heated reaching across the partisan divide type of negotiations that averted the Fiscal Cliff on raising the Debt Ceiling and the GOPs proposed very unreasonable Federal spending cuts sans raising taxes on the richest 1% of America, this would certainly spook the global markets yet again.

The good news is that America’s low and middle income classes won’t be facing an increased tax burden if the looming Fiscal Cliff hasn’t been averted. The bad news is that the US government’s Debt Ceiling will reach the 16.4-trillion U.S. dollar mark in a few weeks time. A “new deal” on balancing the Federal government’s budget deficit that doesn’t involve a more progressive taxation scheme – ending the Bush era tax cuts on the top 1% of America that never seemed to trickle down for over a decade now - and spending cuts on not-so-essential government programs will only widen the partisan divide, as opposed to bring in a sense of both fiscal and economic sense, to the runaway spending at Washington, D.C.

Can Abenomics Save Japan’s Economy?

After the landslide victory that elected the LDP party into the Japanese parliament, will reelected LDP head Shinzo Abe be able to revive Japan’s two-decade long stagnant economy? 

By: Ringo Bones

Former Japanese P.M. Shinzo Abe’s sweeping return to power during the recent Japanese elections has been deemed a breath of fresh air to the Japanese economy stagnant for two decades now. Abe’s proposals for reviving the Japanese economy had already been dubbed as “Abenomics” and many tenured Japanese economists already have high hopes that it could end the two decade long Japanese economic stagnation. 

For all intents and purposes, Abenomics is just Keynesian Economics tailored in a way to end Japan’s two-decade long economic stagflation. Newly reelected Shinzo Abe already promises to print more money and spend it too boost the lagging infrastructure sector. Abe’s proposal for the Bank of Japan to print more money despite of the projected 2 percent resulting inflation could benefit Japanese exporters who had been hurt by the super-strong yen.

Even though Abe inherited a split parliament, a stagnant economy, the world’s biggest debt of any industrialized country which stands at twice the country’s own annual GDP, the Japanese economy recently slipping back into technical recession back in November and the country still reeling in from the earthquake and tsunami that caused the Fukushima nuclear power plant meltdown back in March, 2011, Tokyo stocks soared 1.6 % during Monday’s (December 17, 2012) opening over the news of Shinzo Abe’s reelection. Can Abenomics be the key in tackling all of this?

Shinzo Abe’s promise to fix the now third largest economy (sadly, Japan was overtaken by The People’s Republic of China as the world’s second largest economy this year) by allowing the Bank of Japan to print more stimulus money has its critics too. During the past few years, flushing newly printed money to the Japanese economy did manage to devalue the yen long enough for the benefit of the Japanese export industry seems to work only for a few days or so before the weakened yen became super-strong again.  

Weather Derivatives: Cashing In On Climate Change?

Even though almost all corporate entities and government institutions now recognize the “financial risk” posed by climate change, are weather derivatives just a way of cashing in on the said risks?

By: Ringo Bones

Back in November 20, 2012, Philippine President Benigno Aquino has just signed into law a one billion peso (24 million US dollar) “Survival Fund” to counteract the effects of climate change. The law often referred to as the “Philippine Climate Change Insurance” by the local press is meant to fund climate change adaptation projects since the Philippines is battered, on average, about 20 typhoons a year that cause large-scale deaths and damage to the nation’s agricultural sector says Climate Change Commission deputy head Mary Anne Lucille Sering. It would also be used to guarantee a kind of climate risk insurance for farmers in case of crop damage, she added.

While underwriters of the bill say it is pegged or indexed with the ebb and flow of the Makati Stock Exchange – at least from an actuarial perspective as a kind of “weather derivatives”. With corporate entities and government institutions now recognize the financial risk posed by climate change – are weather derivates, or related climate change risk insurance policies, a sound fiscal decision to mitigate the risks of climate change – or is this just a way for corporate entities and insurance companies to “cash in” on the risks posed by climate change?

Contrary to popular belief, weather derivates differ from a true-blue climate change risk insurance policy because a typical climate change risk insurance policy generally provide protection against low probability, big catastrophic events like hurricanes and tornadoes while weather derivatives are more often than not used to cover more mundane weather events like a heating oil company hedging against having a warmer-than-expected weather. By definition, a weather derivative is a financial instrument that seems like an insurance policy but is more like an option. Most existing weather derivatives are based on how much the temperature goes above or below 65 degrees Fahrenheit, but also, weather derivatives can be based on anything measurable, like rainfall and snowfall levels.

Given that weather derivatives and its corresponding options had been traded on the Chicago Mercantile Exchange since 1999, many see it as a way for big companies to “cash in” on the weather related vagaries posed by climate change – especially given that one of the early corporate pioneers in trading weather derivatives was the “iffy” Enron Corporation through its Enron Online unit. Whether it is a truly long-term economically viable way to insure one’s assets against the vagaries of climate change risks is often highly debatable at best.

Unlike your “garden-variety derivatives”, weather derivatives don’t have a standard model in valuing it – like the Black-Scholes formula for pricing European-style equity options and similar derivatives. This is primarily due to the fact that the underlying asset of weather derivatives is non-tradable which violates a number of key assumptions frequently associated with the Black-Scholes Model. Typically, weather derivatives are priced in a number of ways: via business pricing, historical pricing or burn analysis, index modeling, physical models of the weather and a more superior approach through a mixture of statistical and physical models.