Contingency Capital Hybrid Bonds, the arrival of the new financial world! Citi and BOA looking good.

I was having a meeting yesterday when my friend smsed me, updating me the price of Sarin Tech. He asked me whether I knew that the stock had crossed the $0.60 mark, I replied that I was too busy to look at the price of the stock. I guess I shocked him, because he commented that I must be really cool to be trading and not watching the stock. I told him it was a high conviction play so there is no need to watch it too much. Of course, after the momentum ends, it will be necessary to pay more attention for a possible reversal but in the short term it should continue to look strong. I have to reiterate that this blog was not meant to be a trading tips site, I prefer it to be an investment website.

A lot has happened during this week, I hope most of you got richer in the process. For me, I would have liked to trade a lot more but due to my ridiculous schedule I have not benefited from this rally as much as I would have liked. Even though I would have liked to write a post during midweek but thanks to my lovely job, I am restricted to one or two posts a week. But rest is assured, I am still on top of the happenings in the market, and still quite blurry over what happened to Jack Neo. I am sure one of my good friends will update me on the whole debacle soon. Heh. Hang in there Jack, it happens to the best of us. This is a time when all of men need to rally around him. Ok but that is a topic which will be left for a different occasion.

Focusing on the update on the market first. The market has done well this week, especially with the lack of data and catalysts, it has steadily tracked upwards. Quietly, we are almost close to the highs for the year and as I HAVE SAID BEFORE, THE GREEK DEBACLE WAS JUST NOISE. TOLD YOU GUYS SO! Moral of the story, the media knows nothing, and the majority of analysts too. That is why I am writing this blog, to show you guys that the world is full of impostors who will try to sell you any story. Rationality and logic must prevail, think for yourselves and not read too much into analyst and journalist's reports as they sometimes have clouded judgements and conflict of interests.

Went through the papers for the week once again, trying to find something news worthy and worth focusing on, but I guess all the good journalists were out searching for more girls that got hit on by Jack Neo rather than finding a good story to publish. However, if one looks hard and carefully enough, there are always subtle hints that will provide us good clues on the market direction.

If you are a close follower of the markets, you will realise that the financials in the US and Europe has done very well over the past 2 weeks. Citibank, one of the stocks that I pay close attention to was up almost 20 percent for the week before the pullback on Friday. So why were financials doing so well and will it continue to flourish over the next few weeks? You want an answer? Let me give it to you.

YES.

Funding has been the main issue for banks over the past couple of years. Banks have been low on funding and capital requirements were barely met, they were holding onto too much toxic paper and their capital ratios were all hit. They scurried to issue more equity to their poor shareholders because their shareholders had no choice but to subscribe to their new shares (Temasek one of them). It was also the cheapest way to raise capital as they did not need to pay dividends on those shares if they do not do well. Some of them (Goldman, UBS etc) did choose to issue convertible bonds or preference shares, that led to them paying up to 10% per annum on their debt. Now you wonder why shareholders are the ones to suffer when markets turn down. heh.

So you may ask, why am I still bullish on financials after the strong run up in the past 2 weeks? 2 words...Hybrid bonds. There was an article on Rabobank issuing hybrid bonds as contingency capital for itself. Contingency Capital is becoming the flavor of the financial industry because it is a cost effective way to manage their capital adequacy and it will give investors more confidence that a repeat of the 2007 crisis is unlikely. Many investors have shunned Citi and Bank Of America, preferring the likes of Goldman and JP Morgan. There has been a lot of interest from investors on this front, buying into the debt and there is no lack of liquidity and demand for it.

What does this mean? I believe that with this new found zest for contingency capital, the weaker banks will do well because investors will no longer be pricing in a risk premium on the stock prices. Both are still trading below their book values and profitability is on its way back. What is going to happen? I believe trading up to their book values will be a good target for their stocks. So am I going to be right? Only time will tell.

As I have always believed, investment bankers are probably the smartest people in the world, because they will always be able to find ways to go around the system. No more CDOs, subprime etc, no problem, there will always be new instruments to con people into a new false sense of security. This is their answer and they will once again find a way to bring the good times back to the financial industry. You can never stop an investment banker from making good money. Just look at their bonuses. Hahaha.

So I am making a call for the weaker banks especially Citi and BOA. General Electric is also one of my favourites. Do not forget the private equity firms like Blackstone and KKR. I am calling for a buy on all of them. So let it rip!

Best,

SVI