More Dry Bulk Update

More update on the dry bulk sector.

Posted on Reuters:

• India dry bulk shippers brace for rough sail ahead
  
  By Swati Pandey
  
  MUMBAI (Reuters) - Dry bulk shippers in India are scrambling to put their vessels on long-term contracts and defer new orders on fears a slump in charter hire rates will bite into their earnings this year and beyond, officials said.
  
  The Baltic Dry Index, a gauge of shipping costs for commodities, has fallen more than 90 percent to a little over 800 points from a peak of 11,793 points in May.
  
  Several dry bulk carriers have been sitting idle for days as poor demand has taken a toll on shipments, which have fallen over 90 percent from a year ago, analysts said.
  
  "The scenario is a lot more painful as far as dry bulk is concerned. There is a significant impairment on earnings," Bharat Sheth, Managing Director of Great Eastern Shipping, which has 11 bulk carriers, said on a conference call last week.
  
  Officials were also concerned about renewal of contracts, as there were no takers for long-term covers and rates were abysmally low.
  
  Average earnings on vessels in the spot market are seen falling by 70-90 percent, Sheth said, adding he would immediately shift spot vessels to term contracts if the pricing was suitable.
  
  On the contrary, offshore and oil tanker segments were still healthy, though rates have softened by nearly half since the peaks seen early this year.
  
  Firms that placed orders for dry bulk vessels over recent months, when freight rates were climbing steadily, have now deferred them as the sector does not look lucrative anymore.
  
  A dry bulk carrier moves unpackaged cargo such as grain, coal, ore and cement, demand for which has significantly dropped due to a global economic slowdown and tighter trade finance.
  
  However, Essar Shipping Port & Logistics was largely insulated from the slump, a top official said, as 80 percent of its bulk carriers were on long-term contracts. Still, it has deferred acquisitions due to poor market conditions.
  
  The company had planned to buy three carriers this year.
  
  "Because of demand getting shrunk and new supplies (vessels) getting in, the dry bulk trade is declining. Throughput itself has shrunk considerably," said Divyanshu Tambe, analyst at I-maritime Consultancy.
  
  Throughput is a measure of the number of vessels or containers handled by a port over a period of time.
  
  
  ROUGH SEAS AHEAD
  
  Analysts widely expect profits at dry bulk shippers to slip significantly in FY09 and the year after, while those that have not secured firm contracts may even turn in losses.
  
  Dry bulk segment comprise an average 25 percent of shipping companies' revenues.
  
  Most shippers posted a spectacular jump in quarterly profits for July-September, buoyed by strong charter hire rates in earlier quarters and income from new vessels.
  
  "What we saw - quarter two - will be the best quarter in terms of numbers for years to come. In the coming quarter, Mercator Lines will take the biggest hit in profit, followed by SCI," a Mumbai-based analyst said.
  
  Mercator Lines owns and controls 12 dry bulk carriers while state-run Shipping Corp of India has 20.
  
  "At least 1-½ years from now on... till FY10 will be bad for these companies. It will be a while before we come out of it," I-maritime's Tambe said.

Issues to consider.

1. Several dry bulk carriers have been sitting idle for days as poor demand...

2. .. no takers for long-term covers and rates were abysmally low

3. .. offshore and oil tanker segments were still healthy

4. Firms that placed orders for dry bulk vessels over recent months.. have now deferred them as the sector does not look lucrative anymore. - this is a massive, massive concern for dry bulk vessel builders, yes?

5. Analysts widely expect profits at dry bulk shippers to slip significantly in FY09 and the year after, while those that have not secured firm contracts may even turn in losses. - expect losses!

And the following article on FT.com highlights the potential massive losses due to derivatives! Yes it would appear that even shippers uses derivatives!

• Wave of losses looms for shipping industry
  
  By Robert Wright in London
  
  Published: November 4 2008 02:00 Last updated: November 4 2008 02:00
  
  Fears are growing in the shipping industry over the potentially big losses that could emerge this week on derivatives triggered by the October collapse in rates to charter dry bulk ships.
  
  Since short-term dry bulk charter rates plunged 71.9 per cent in October, traders and shipowners have worried that traders might be caught out by the speed and severity of the fall.
  
  Traders in forward freight agreements - derivatives based on short-term charter rates - could owe significant sums if they were betting on a rise in charter rates for ships carrying coal, iron ore and other commodities.
  
  The sector's Baltic Dry index of charter rates started the month at 3,025 points and closed on Friday at 851. The 80 per cent of trades made through clearing houses were being settled yesterday, while traders who bought cash-settled products through private transactions, known as over-the-counter trades, have until Friday to settle.
  
  The many shipowners participating in FFA markets could also face losses if their market positions went beyond simply covering the market exposure of their actual ships.
  
  London-based, New York-listed Britannia Bulk, which has been hit by its exposure to speculative FFA trading, put its British operating subsidiary into administration on Friday. It is the first quoted shipping company to suffer such a blow during the current downturn.
  
  Duncan Dunn, senior director in the futures division of London's Simpson, Spence & Young shipbrokers, said the market's very rapid fall would have left anyone betting on upward movements needing to make substantial payments. "If they're under strain, then that's only going to increase their problems," he said.
  
  Market participants' concerns have been heightened by the possibility of knock-on effects from failures of investors affected by FFA market losses.
  
  If investors facing FFA market losses hand back ships they had chartered early to owners, the ships' owners will earn considerably less than they expected. They could face problems servicing debt related to the ships.
  
  Michael Bodouroglou, chief executive of Paragon Shipping, a Nasdaq-listed dry bulk shipowner, said that, even if a company had not participated in FFA trading itself, counterparties such as ship charterers might have done so. "Company failures may cause a domino effect," he said.

However, there is is one optimistic dry bulk shipper!

CEO: Don't Dump DryShips

• There are rough waters ahead for shippers, but DryShips is looking for opportunities and George Economou, the company's controversial chief executive, is confident he will weather the storm.
  
  On Monday the company posted a 71% spike in third-quarter profit, boosted by increased freight rates, though its earnings missed analysts’ expectations.
  
  Cantor Fitzgerald analyst Natasha Boyden said the company fell short of the Street’s forecasts primarily because of increased general and administrative expenses of $25.9 million, higher than her estimate of $10.5 million. Its operating expenses for its ocean drilling rig unit was $40.9 million, versus Boyden’s forecast of $27.6 million.
  
  Given the uncertainty in demand, Boyden is concerned over DryShips' substantial spot market exposure for 2009, which Boyden estimates at 41.0% of its vessel days.
  
  Nonetheless, Economou’s optimism rubbed off on investors, who sent the company's stock soaring 14.0%, or $2.69, to close at $21.94. DryShips shares have tumbled 71.8% since the beginning of the year. Greek shipping billionaire Economou has been criticized for running DryShips, a pubic company, as if it was private.
  
  The global credit crunch has punished the shipping industry, with virtually no vessels on spot charters moving. That's a sign that the frozen credit markets and worries about economic growth have stifled commercial activity.
  
  But Economou said he expects the situation to improve as commodity stockpiles are drawn down and financing thaws out. Meanwhile, the credit crisis has delayed delivery of new freighters, since buyers can no longer get financing, and that benefits DryShips, which, Economou said, has a large enough fleet to keep up with reviving demand. DryShips announced last month it plans to take over 9 Cape-size ships that had been owned by Economou’s privately held Cardiff Marine.
  
  Economou said DryShips is also strong financially, with cash of $456 million and another $1.2 billion of available capital from bank lines, for total liquidity of $1.6 billion. But DryShips has the most outstanding debt in the sector and its total debt has shot up 131.3% over the prior year.
  
  DryShips patted itself on the back on Monday for shifting its chartering strategy prior to the recent bloodletting in the dry-bulk industry. During the second and third quarters, when the freight rates were at all-time highs, DryShips upped its long-term charters to more than half its business. That had the effect of locking in rates for an average of five years.
  
  On Monday the Baltic Dry Index, which is managed by the Baltic Exchange in London and measures dry bulk shipping rates on 40 routes across the world, fell for the 21 st straight session, slipping 24 points, to 847. Freight rates on Capesize ships, the mega-carriers that can't fit through canals, declined 4.4%, to $5,716, down from $5,982, on Sunday, and 28.9% lower than the prior week. The Baltic index has been hit by worries over tumbling steel prices, the global credit crunch, a slowdown in the world economy and declining demand for commodities.
  
  On Monday, DryShips reported that its third-quarter net income jumped to $179.98 million, or $4.21 per share, up from $105.28 million, or $2.97 per share, in the prior year. This included a capital gain on the sale of two vessels of $65.8 million or $1.54 per share and a noncash loss of $36.8 million, or 86 cents per share, associated with the valuation of interest-rate swaps.
  
  Excluding these items, net income was $151.0 million or $3.53 per share, below analysts’ expectations of $3.60 per share for the quarter.
  
  Revenue jumped to $329.0 million, up from $150.0 million last year, beating analysts’ estimate of $306.0 million.
  
  Meanwhile, the company's Ocean Rig unit, an ultra deep-water drilling operator, contributed $89.0 million to DryShips' bottom line.
  
  DryShips said the spin-off of the ultra deep-water driller will occur on schedule; the new entity will be named Ocean Rig UDW.
  
  Day rates for ultra-deep water drilling remains very strong--the company said it recently struck a fixture between $640,000 and $650,000 a day for a term of five years.
  

Ahem!.. DRYS went soaring 14.0%, or $2.69, to close at $21.94????

WOW!

I remember DRYS. It was trading around 110 back in May 2008! And now it's 21.94??!!

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Why Tasmanians shouldn't breed

BAHAHAHA! Fucking Tasmanians! Seriously, only Tasmanians would be stupid enough to make the comments in the story below which appeared in The Australian on Friday. I've highlighted the parts I found particularly amusing. Note: BEST. HEADLINE. EVER.

Tasmanian tourism hopes cannibal film will attract tourists
By Katherine Field | October 31, 2008

TASMANIANS hope a new Australian horror film about cannibals will attract more tourists and movie makers to the Apple Isle.

The film, Dying Breed, portrays a remote Tasmanian community as flesh-eating savages.

But Tasmania Tourism Council chief executive Daniel Hanna said the movie, mostly filmed near the Pieman River, western Tasmania, should help lift the state's profile.

"Any film that shows some of the key parts .. like the rugged wilderness, is going to be a good thing and will hopefully spark some interest," Mr Hanna said today.

"Obviously as long as visitors don't expect there really to be cannibals in Tasmania."

Starring Leigh Whannell and Nathan Phillips, the film, to be released on November 6, is about four people searching for the Tasmanian Tiger when they happen on a cannibal tribe descended from escaped convict Alexander `the Pieman' Pearce.

Pearce was a real life convict who escaped a brutal penal colony in the 1830s and survived by eating other people.

West Coast Mayor Darryl Gerrity said the story's background was real and locals were happy to promote the area.

"Cannibalism did happen here, you can't ignore history although it's a bastardisation of that story," Mr Gerrity said.

Mr Gerrity joked that locals should have been used as the actors.

"Most of us would have fitted the bill admirably and true to life.

"Because we're all descendants of the Pieman."

Mr Gerrity said the area had "lots of stories here that would make good movies".

Director and writer Jody Dwyer said filming the movie, which had a $3m budget, was difficult as a lot of equipment had to be shipped to Tasmania.

Some scenes were also shot in Victoria's Dandenong Ranges.

Dwyer said the Tasmanian wilderness and isolation played the role of a character in the film, he said.

"I would have loved to have shot the whole thing in Tasmania, but I'm afraid Tasmania don't really have any back-ups in terms of film industry," Dwyer said.

Dwyer said he wanted to make a movie that would appeal to people worldwide and was commercially viable.

He believed other horror films such as Saw and Wolf Creek were changing the way Australian films were viewed internationally.

"There is a move to be more commercially aware by a new wave of filmmakers that is actually getting tired with the cliches of drug ridden suburbia or flat red heat haze outback movies, we've seen a lot of them," Dwyer said.

"You are going to still make those the Rowan Woods films, – the Little Fish films because they're beautiful films but they won't do well internationally they will be respected but not do well economically.

"A lot of films are being funded that nobody wants to see and it's a shame because people want to support the industry but if something doesn't excite me I won't spend my 15 bucks."

Dying Breed opens on November 6.

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Forget coffee, lets breed baby!

It's no secret I'm a fan of horror movies and the latest Australia offering has got me peeing my panties with excitement. The fact it's yet another juicy Australian production may also have a lot to do with my excitement. Regardless, it's great to see Australian films being made that aren't about the outback or recovering drug addicts or coming of age. One of my favourite films is Wolf Creek and I was a fan of the Saw franchise (until they started producing a thousand bastardisations) and Dying Breed is from the creators of those. Dying Breed interweaves the two most fascinating icons of Tasmanian history: the extinct Tasmanian tiger and 'The Pieman' (aka Alexander Pearce) who was hanged for cannibalism in 1824. Basically four people searching for the Tasmanian Tiger in the wilderness stumble across the descendants of `Pieman'. Terror ensues. The film stars two of the biggest names in Australian horror- Leigh Whannell one of the stars and creators of Saw and Nathan Phillips from Wolf Creek. The trailer for this film is pretty darn freaky (to say the least) and hopefully its as successful as its predecessors. Decent horror movies are few and far between these days but in recent years Aussie horror films have struck a rare balance between being critical applauded and commercially successful overseas, a rare feat especially within said genre. Keep the quality Aussie horror coming!
View the trailer here:
http://au.youtube.com/watch?v=72tfEhFcIS8

Above: Image from Dying Breed set

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Maybulk Is Cut To Underperform Target Price of 1.80

Saw the following note on Dow Jones News wire.

• Credit Suisse downgrades Maybulk (5077.KU) to Underperform from Neutral, cuts target to MYR1.80 from MYR3.80; this after reducing Baltic Drybulk Index (BDI) FY08 forecast by 64% to 2500 and FY10 by 70% to 1500. As a result, cuts Maybulk net profit estimate by 15%-56%, dividends reduced in FY09 by 50% and FY10 by 73%, lowering yields to 5.9% in FY09 and 3.2% in FY10. Analyst Annuar Aziz also turns mildly cautious following company's proposed $221 million related party transaction to buy 22% stake in PACC Offshore Services as no future profitability disclosed. Shares +6% at MYR2.49.

Cuts target to only rm 1.80.

Justifiable? BDI at this moment of time is below 900.

Secondly, that PACC thingee. It's a related party transaction. RELATED.

And when no future profitability is disclosed, analyst Annuar Aziz does have a very strong point, a $221 million point, yes?

Do you like related party transactions?

I don't! I just cannot stand all this related party transactions!

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Mizuho's $7 Billion Urban Legends!

Here's yet another Urban Legend Story for all the wrong reasons!!

Mizuho $7 Billion Loss Turned on Toxic Aardvark Made in America

• Oct. 29 (Bloomberg) -- Alexander Rekeda, a 34-year-old Ukrainian-born math whiz, turned in his BlackBerry and security card and sent an e-mail to his bosses at Calyon, the investment- banking unit of Credit Agricole SA. Then, along with ten colleagues from the New York structured-finance team, who fired off similar messages, he walked two blocks down the Avenue of the Americas to Mizuho Financial Group Inc.
  
  It was Dec. 8, 2006, and Rekeda's arrival was a coup for Mizuho, Japan's second-largest bank by revenue. A month earlier, it became the first Japanese lender to list on the New York Stock Exchange since 1989 -- a move hailed by John Thain, then chief executive officer of the bourse, as a sign that Mizuho was taking ``its place among the world's leading companies.''
  
  The hires would prove a costly blunder. Rekeda, who became head of structured credit in the Americas, and his team led Mizuho into a business it knew little about, securities backed by U.S. subprime mortgages, where it lost 672 billion yen ($7.1 billion), more than any bank in Asia. Most of the losses were related to defaults on collateralized debt obligations.
  
  Mizuho expects as much as 20 billion yen in potential further losses on bonds and bad loans related to bankrupt Lehman Brothers Holdings Inc., company spokeswoman Masako Shiono said on Sept. 16. Moody's Investors Service, citing ``questions regarding the effectiveness of Mizuho's risk management and its risk appetite,'' continues to give the bank a negative outlook.
  
  ``Mizuho never made a penny out of subprime in the good times, they just got left holding the can in the bad,'' says David Threadgold, an analyst at Fox-Pitt Kelton Asia Ltd. in Tokyo who has an ``underperform'' rating on the stock. ``They made a very poor decision to launch into the packaging of subprime products at the end of 2006.''
  
  Toxic Assets
  
  How a Japanese bank that traces its roots to 1864 made such a bold entry into the U.S. subprime securities market, and almost choked on the toxic assets it created, is a tale of overreaching and poor timing. It also illustrates how financial technology made in the U.S. wreaked havoc on the other side of the globe.
  
  Many of the details are spelled out in a lawsuit Calyon filed against Mizuho in U.S. federal court seeking $750 million for ``covertly'' inducing its employees to quit. The case was settled out of court in September 2007 for an undisclosed amount. Shiono said Mizuho wouldn't comment for this article.
  
  Rekeda, who has a master's degree in mathematics from Kiev State University of Economics in Ukraine and an MBA from the University of Connecticut, had built Calyon's CDO business over two years. He closed six deals for the French bank in 2006, according to an affidavit in the case.
  
  Signing-On Fee
  
  All six, including two with the celestial names Cetus and Orion, later defaulted as Paris-based Credit Agricole racked up more than 6.5 billion euros ($8.1 billion) in subprime losses. Rekeda, now 34, declined to be interviewed.
  
  On Oct. 18, 2006, Rekeda and his team were offered an $11 million signing-on fee to defect to the Japanese bank, a Calyon lawyer said at a court hearing. Mizuho's plan to expand into the U.S. was hatched earlier that year, as Japanese lenders were recovering from a 14-year debt crisis that forced them to take $1.1 trillion in writedowns for bad loans.
  
  Mizuho, formed in 2000 in a merger of three banks, beat out rivals Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc. to win approval from U.S. regulators to set up a financial holding company. That enabled it to operate as a full-service investment bank.
  
  As Mizuho President Terunobu Maeda said at a press briefing on May 15 this year, the bank had excess capital and ``needed to study'' the U.S. mortgage-backed securities business.
  
  Bad Loans
  
  Maeda, 63, a former chairman of the Japanese Bankers Association and an amateur gardener who doesn't use air conditioners at his home during Tokyo's humid summers to make an environmental point, became president of Mizuho in April 2002. The bank recorded a loss of 2.38 trillion yen that fiscal year as it wrote off bad loans accrued during three recessions in a decade. Maeda returned it to profitability the next year after reducing non-performing assets and through gains on investments in Japanese stocks.
  
  While Mizuho was a newcomer to the CDO market in the U.S., it had experience arranging and selling similar investments in Japan and Europe. The company had ramped up its loan- securitization business, which Japanese banks were able to do without borrowers' consent after October 1998. Merrill Lynch & Co., Bear Stearns Cos. and Goldman Sachs Group Inc. all helped Japanese banks repackage and market securities backed by corporate loans and mortgages.
  
  Rising Delinquencies
  
  Even so, Mizuho decided it needed help in the U.S. Talks with the Calyon team began in early 2006, when Douglas Munson, a sales director for the French bank, approached golfing buddy Theodore Ake, head of fixed income for Mizuho in New York, according to two people familiar with the negotiations. The size of the group and the amount of sign-on bonuses snowballed after Rekeda was brought into the discussion, the people said. Munson and Ake declined to comment.
  
  By the time the deal was consummated, the market was turning. On Dec. 11, 2006, the same day Mizuho announced it was setting up an office in the U.S. to create asset-backed debt securities, Fitch Ratings said the outlook for U.S. subprime mortgage bonds was ``negative.'' It expected delinquencies on those loans to rise by 50 percent.
  
  There was also confusion about the hiring deal. The Calyon team turned out to include more than the five people expected by Hitoshi Shimoyama, then deputy president of investment banking unit Mizuho Securities USA Inc., documents in the case allege.
  
  ``Mizuho did not even know the number or names of additional persons until shortly before they came,'' Shimoyama said in a March 17, 2007, affidavit.
  
  Bonus Pool
  
  Benjamin Lee, one of those who defected on Dec. 8, returned to the French bank five days later. He said he ``had been misled by Rekeda'' about the terms of employment at Mizuho, according to an affidavit he filed.
  
  Lee said he was initially told by Rekeda that he could expect $1 million to $1.5 million from a bonus pool. He later learned there was a separate contract for him and other junior members of the group that didn't include a revenue-related bonus. Senior team members were entitled to share as much as 25 percent of revenue from completed transactions, court documents said.
  
  Rekeda's group priced its first deal within 10 weeks, after the Mortgage Bankers Association reported that the default rate on U.S. subprime loans reached 12.6 percent, the highest level since the first quarter of 2003.
  
  Aardvark CDO
  
  The deal was named after a squat animal with a pig-like snout that feeds on ants and termites. Incorporated as a special- purpose company in the Cayman Islands, Aardvark ABS CDO was an ugly concoction: 31 percent of its $1.5 billion of securities were backed by subprime loans, 23 percent by residential mortgages repackaged from other CDO deals, and 33 percent by Alt- A mortgages, a category just above subprime. The remaining 13 percent were prime loans.
  
  One reason Rekeda was able to move so fast was that the deal had already been assembled by London-based Lloyds TSB Group Plc, which pulled out before completion, said three people familiar with the transaction. HarbourView Asset Management Corp., a unit of New York-based OppenheimerFunds Inc., stayed on as manager. Spokesmen for Lloyds and HarbourView declined to comment.
  
  Moody's assigned its highest short-term rating of P-1 to $1.3 billion of the Aardvark securities. In the prospectus, Mizuho pledged to back 87 percent of the deal, meaning that the bank, rather than investors, was on the hook for most of the potential losses.
  
  In the Pipeline
  
  A subsequent Mizuho offering, Tigris CDO 2007-1, valued at $902 million in March 2007, was backed by the lowest investment- grade tranches of CDO deals arranged by other Wall Street firms, including Merrill, Lehman and Citigroup Inc., according to a report that month by Fitch Ratings. More than 80 percent of the securities in the CDO had Fitch's lowest investment rating, BBB-, which is nine grades below AAA.
  
  Rekeda planned to bring at least nine more CDO deals to market within six months, the investment newsletter Asset-Backed Alert reported on May 11, 2007. The newsletter quoted him saying the bank had ``built up the pipeline.'' As of April 1, 2007, Mizuho Securities had amassed more than 550 billion yen in residential mortgage-backed securities and CDOs supported by home loans, according to the bank's financial statements.
  
  One of those deals made it to market in June 2007: a special-purpose entity called Delphinus 2007-1. Although named after a constellation, its contents were hardly stellar. Three- quarters of its securities were based on subprime mortgages, according to a July 23 Fitch report.
  
  Ratings Downgrade
  
  About 80 percent of the deal was backed by credit-default swaps arranged by firms including JPMorgan Chase & Co., Citigroup and Wells Fargo & Co. Citing ``strong demand'' from investors, Mizuho increased the size of the deal that July to $1.6 billion from $1.2 billion.
  
  That was eight days before two Bear Stearns funds were shut down, heralding the start of the subprime crisis. Less than three months later, on Sept. 27, Fitch put Delphinus on its watch list. The negative designation, Fitch analyst Kevin Kendra said at the time, was ``probably the quickest I've seen'' on a CDO. In other words, Mizuho struggled to find buyers for its CDOs and, as their values plummeted, the bank would have to absorb the loss.
  
  Mizuho didn't tell investors about the extent of its exposure until November 2007, when it reported a 70 billion-yen loss on subprime-related securities in the first half ended Sept. 30. It also said it expected that figure to grow to 170 billion yen for the full year.
  
  CDO Default
  
  By December, Mizuho had halted its U.S. CDO business. It fired Rekeda and at least four others on the team, putting an end to the bank's one-year experiment with American financial technology.
  
  In January, as delinquencies on loans that backed Mizuho's CDOs increased, Aardvark, Tigris and Delphinus went into default. Subsequent downgrades of all of the tranches of Tigris and Aardvark required the bank to write down the value of the CDOs.
  
  Mizuho had to inject 150 billion yen of capital into its securities unit, shelve a planned merger with Shinko Securities Co. and axe 300 jobs. The bank's shares lost half their value in the fiscal year ended March 31.
  
  When a record 2,474 shareholders gathered at the Tokyo International Forum on June 26 for the bank's annual meeting, they were out for blood.
  
  ``The responsibility rests at the top with Maeda,'' Kenjiro Endo, 66, who bought Mizuho shares when he retired from chipmaker Toshiba Corp. six years ago, said after the meeting. ``If this were overseas, he'd resign.''
  
  `Market Crashed'
  
  Endo may have had a point. Citigroup CEO Charles O. ``Chuck'' Prince, Merrill's Stan O'Neal and Wachovia Corp.'s Kennedy Thompson were all forced to resign after significant subprime losses. In Japan, where executives often bow and apologize for their mistakes, Mizuho's Maeda stood firm.
  
  ``Unfortunately, from October, the securitized investment- product market crashed, and even if we tried to sell the investments, it wasn't possible,'' Maeda said at the shareholders' meeting. ``When the market stops functioning, there is no measure to avoid it.''
  
  Maeda also defended the bank's decision to enter the U.S. securities market.
  
  ``It's not because of some management failure that things turned out like this,'' he said. ``I am very sorry to tell you, doing nothing, and not taking risk, is not a bank.''
  
  Failure to Hedge
  
  Yet Mizuho might have incurred half as many losses if it had accelerated the sale of subprime-related investments and hedged more bets with credit-default swaps, according to a person familiar with its U.S. operations. The bank, fearing it would lose as much as two-thirds of its potential profit, decided not to hedge, the person said. Mizuho declined to comment.
  
  ``The holding company was unable to grasp the size of losses at Mizuho Securities when the subprime problem emerged,'' said Keisuke Moriyama, a Tokyo-based analyst at Nomura Holdings Inc. ``Mizuho has a governance problem. How it fixes it is the biggest issue that faces the group.''
  
  The ultimate cost to Mizuho may be greater than the 672 billion yen it wrote down. The bank, the first in Japan to put money in U.S. financials amid the credit crunch, invested $1.2 billion in Merrill in January. The Wall Street bank's shares have slumped 70 percent this year.
  
  `Missed Out'
  
  Now Mizuho is sidelined as other Japanese banks swoop in to buy troubled U.S. assets. Nomura purchased some of Lehman's Asian and European businesses in September, and Mitsubishi UFJ, the nation's largest bank, acquired 21 percent of Morgan Stanley for $9 billion.
  
  ``Mizuho has totally missed out,'' said Amir Anvarzadeh, director of Japanese equity sales at KBC Financial Products in London. ``They've been very aggressive overseas, trying to grow this business organically, and some of those ambitions have come back to haunt them.''
  
  Although it was the biggest loser, Mizuho wasn't the only Japanese bank that got hurt. In all, 672 domestic banks and credit cooperatives had 1.5 trillion yen in losses from overseas securitized products, the country's financial regulator reported Sept. 4.
  
  Rekeda, meanwhile, has moved on. He now works for Guggenheim Capital Markets LLC in New York, along with Paolo Torti and Xavier Capdepon, who both followed him from Calyon to Mizuho. Their new jobs: selling distressed CDOs at a discount. (!)

Source: here

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Prem Watsa: The Man Who Beat The Shorts

Blogged last month: Prem Watsa Explains Why This Will Be A Long And Deep Recession Globally!

So who is Prem Watsa?

The Forbes recently has a nice coverage on Prem and his Fairfax International: The Man Who Beat The Shorts

• In the current economic meltdown Prem Wasta and his Fairfax Financial are among the few winners.
  
  Did short-sellers make the market go down? Maybe, maybe not. But here's one stock they tried, and failed, to send into a tailspin: Fairfax Financial Holdings. From Labor Day through Oct. 23, when the market fell 29%, Fairfax was up 18% on the New York Stock Exchange, from $216 to $255.
  
  Fairfax is an insurance company in Toronto that took in $4.5 billion last year in net premiums on policies that cover property and casualty or reinsure other insurers' liabilities. It is the creation of V. Prem Watsa, 58, an immigrant from India and an investing genius. If not a genius, he is one of the luckiest gamblers around. He's been bearish for several years and by January had 80% of his firm's $20 billion portfolio in cash and U.S. Treasurys.
  
  Despite, or because of, Watsa's history in building up Fairfax from the remnants of an almost busted trucking insurer that he took over in 1985, short-sellers figured that he would make a good target. They started spreading the theory that the rapidly growing firm was underreserved. The battle got ugly at times, if there's any truth to the accusations in a lawsuit Watsa filed in 2006 against his Wall Street enemies, charging them with market manipulation. Among those accusations, which are all denied:
  
  --Using the pseudonym P. Fate, unnamed individuals sent a package to the pastor of the church where Watsa presides over the investment committee, warning that Watsa's activities resembled those of convicted insurance felon Martin Frankel.
  
  --Hedge funds shorting Fairfax stock put out wild assertions that the company was the next Enron.
  
  --The shorts got someone to approach Fairfax's former chief financial officer, heavy-handedly threatening criminal prosecution if he didn't cooperate by revealing incriminating details.
  
  --On one day in June 2006 Fairfax Chief Financial Officer
  
  Greg Taylor fielded 41 telephone calls from investors checking out rumors they had heard: that the Mounties had raided the office, that the company was admitting fraud and that Watsa had fled the country with company assets. One caller even demanded Watsa be put on the phone to prove his presence.
  
  The suit, in New Jersey state court, is far from resolution (a trial is expected next year), but Fairfax go some vindication two months ago when one defendant, the brokerage firm Morgan Keegan, announced that it had fired its analyst covering Fairfax for having given advance word of negative reports to short-sellers and hedge funds. In the end, though, Watsa seems to be beating the shorts not with legal tactics but the old-fashioned way, by running a good company. Earnings per share shot up from $12 in 2006 to $58 in 2007, and in the first half of this year to $35. Since the shorts took on Fairfax in earnest starting in 2003, the stock has tripled.
  
  Born in India, Watsa graduated from the prestigious Indian Institute of Technology and moved to western Ontario in 1972 at age 22. Penniless, he lived with relatives while getting his M.B.A. from the University of Western Ontario and moonlighting at night selling air conditioners and furnaces. After taking over, and renaming, an underwriter of trucking policies called Markel, he added a dozen property and casualty insurers, among them the well-known New Jersey firm Crum & Forster and TIG Holdings, once part of San Francisco's Transamerica.
  
  Taking over management of the investments, Watsa produced (according to Fairfax) a compound annual return from 1993 to 2007 on its stock portfolio of 19.5% (versus 10.4% for the S&P 500) and on its bond portfolio of 10.1% (versus 6.6% for a Merrill Lynch bond index). One of his earliest backers--and later a friend--was famed investor Sir John Templeton, who died this year at age 95.
  
  The short-seller interest in Fairfax dates to the early 2000s, when debt-laden acquisitions started to produce huge claims on policies written before Watsa's watch. Even when he was forced to shut down troubled acquisition TIG while turning around Crum, Watsa was able to pay claims with $1.4 billion worth of reinsurance he had acquired. He also raised $1.2 billion with share offerings for some of Fairfax's subsidiaries and Fairfax itself.
  
  The arm-wrestling with the shorts had Fairfax shares oscillating between $48 and $185 in the three and a half years before the company filed its lawsuit. "We have nothing against short-selling," Watsa says now. "We short stocks ourselves." And he takes bearish positions on other companies' debt. In 2003 and 2004 he spent $467 million on credit-default swaps against an assortment of borrowers, among them American International Group, Countrywide Financial and MBIA. So far Watsa has booked a $2.5 billion gain on those positions.
  
  Watsa's only sin was in being a little too early with his prediction that the era of credit expansion would end badly. This is what he said in Fairfax's 2003 annual report: "It seems to us that securitization eliminates the incentive for the originator of [a] loan to be credit sensitive. Prior to securitization, the dealer would be very concerned about who was given credit to buy an automobile. With securitization, the dealer (almost) does not care.…And here's the rub! These asset-backed bonds are rated based on their historical loss experience record which will likely be very different in the future--particularly if we experience difficult economic times."

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China Will Be Hit Hard, Warns BOC Executive

Posted on Singapore Business Times..

• November 1, 2008, 2.39 pm (Singapore time)
  
  China to be hit hard by global recession: BOC exec
  
  SHANGHAI - A global recession will have a huge impact on China's economy while currency volatility is expected to add further pressure on the country's banks, a top executive at Bank of China (BOC) said on Saturday.
  
  'Next year, the global economy is very likely to enter recession and the world's biggest economies, including the United States, Europe and Japan, are very likely to post negative growth and that will have a huge impact on China,' executive vice president Zhu Min told a financial conference in Shanghai.
  
  'The impact of the crisis on China has just started to appear as China has already seen a sharp slowdown in industrial profit growth and fiscal income,' he said.
  
  'The financial crisis will technically precede economic and political turmoil by eight to 12 months,' he added.
  
  China's banks have enjoyed robust profits for years as the country boomed but earnings growth is now slowing as the economy cools from the impact of the global financial crisis.
  
  Although China's banks have manageable holdings of sub-prime-mortgage-related debt, they are exposed to huge foreign currency trading risk from turbulent financial markets.
  
  'The uncertainties in the world's currency markets have exposed the Chinese banking sector to higher foreign asset risk,' Mr Zhu said.
  
  BOC, the country's flagship foreign exchange lender, said on Wednesday profit growth slowed to 12 per cent during the third quarter, from 43 per cent in the first half.
  
  The lender had US$6.2 billion worth of debt issued by troubled US mortgage companies Freddie Mac and Fannie Mae by the end of September, and was carrying US$3.3 billion of sub-prime-related securities.
  
  Mr Zhu said several factors will hurt the banking sector's bottom line such as the possible deterioration of banks' asset quality as economic growth slows, and shrinking interest margins due to the global trend of interest rate cuts.
  
  He expects the industry to face tougher regulations and supervision of derivative products in future.
  
  BOC's focus on trade finance loans means rapidly slowing world demand for Chinese goods will put additional pressure on the lender's loan growth and asset quality, Deutsche Bank said in a recent report.
  
  China's economy grew 11.9 per cent in 2007, but that rate slowed to 9.9 per cent in the first three quarters of this year.
  
  China's manufacturing sector contracted sharply in October, an official monthly survey showed on Saturday, providing more evidence the global financial crisis was taking a toll on the once roaring Chinese economy.

Source: http://www.businesstimes.com.sg/sub/latest/story/0,4574,303766,00.html?

Is there any substance to such view?

How about the following news article on Bloomberg.

• China Manufacturing Contracts as Crisis Trims Exports
  
  By Li Yanping and Wang Ying
  
  Nov. 1 (Bloomberg) -- China's manufacturing contracted as the worst financial crisis since the Great Depression eroded export demand.
  
  The Purchasing Managers' Index fell to a seasonally adjusted 44.6 last month from 51.2 in September, the China Federation of Logistics and Purchasing said today in an e-mailed statement. That was the lowest since the gauge was launched in July 2005. A reading below 50 reflects a contraction, above 50 an expansion.
  
  China's cabinet has pledged extra infrastructure spending to stimulate the world's fourth-biggest economy amid the global slowdown. The government has already lowered rates three times in the past two months, increased export rebates and cut property transaction taxes.
  
  ``The government needs effective stimulus measures to spur growth,'' said Wang Qian, a Hong Kong-based economist at JPMorgan Chase & Co. ``The external economic outlook is worsening rapidly.''
  
  Manufacturing contracted in July for the first time since the survey began in 2005. It also shrank in August. The October index was a record low.
  
  China's economy grew at the slowest pace in five years in the three months through September as export orders shrank and industrial production waned. The expansion cooled for a fifth straight quarter, to a 9 percent gain from a year earlier.
  
  Global Slowdown
  
  Chinalco Luoyang Copper Co., a Chinese processor of the metal, said orders fell 20 percent in the third quarter as domestic and international demand weakened.
  
  The global slowdown is curbing demand for the nation's goods. The International Monetary Fund estimates that advanced economies will expand 0.5 percent next year, the slowest pace since 1982.
  
  Falling property sales and prices in major cities are another drag on China's growth.
  
  The index is based on a survey of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobiles and electronics.
  
  The output index fell to 44.3 in October from 54.6 in September, while the index of new orders dropped to 41.7 percent from 51.3. The index of export orders declined to 41.4 percent from 48.8, the statement said.
  
  The inventory index climbed to 51.4 from 50.5, it said.

Source: http://www.bloomberg.com/apps/news?pid=20601089&sid=asxpXKBhstjU&refer=china

On an another article posted on NewYorkTimes.

• China has long been at the center of claims that the world could keep growing regardless of American troubles. China has been importing cotton from India and the United States; electronics components from South Korea, Malaysia and Taiwan; timber from Russia and Africa; and oil from the Middle East.
  
  But many of the finished goods China produces with these materials have ultimately landed in the United States, Europe and Japan. When consumers pull back in those countries, Chinese factories feel the impact, along with their suppliers around the globe.
  
  Fewer laptop computers shipped from China spells less demand for chips. Last week, Toshiba — Japan’s largest chip maker — said it lost $275 million from July to September, blaming its troubles on a world glut.
  
  Lower demand for flat-screen televisions means less need for flat-panel glass displays. This month, Samsung, the Korean electronics giant, said a global oversupply in that item caused its biggest dip in quarterly profits in three years.
  
  Now, a glut of products may be building in the United States. Orders for trucks used by business have plummeted. Investments in industrial equipment are declining. Yet inventories have grown.

Source: Fear of Deflation Lurks as Global Demand Drops

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