Are We There Yet?

Anyone who has driven on a long road trip with children will be familiar with the cry of “Are We There Yet”. After 13 months of the credit crisis we are also hearing the same cry from investors wondering if we have arrived in Bull Market territory once again.

The children usually start this refrain when they have become bored and tired, regardless of the distance still to be covered to reach the destination. Investors also become bored and tired by bear markets and are impatient to see their portfolio’s resume growth once again. Unfortunately for investors the answer will depend more on where you have put your money rather than the distance you have covered.

Many market commentators have talked about how world markets seem to be operating in tandem with no real decoupling evident. This is true if you are watching falls in the US markets rippling through Asia and Europe the next day. But if you step back and look at things over a larger time frame you can see that the markets are acting more like dominoes rather than operating in tandem.

The credit crisis has its roots in the falling values of US property. Due to financial engineering and credit derivatives most of this risk had been sliced and diced and scattered in various toxic packages around the globe. As the mechanism that allowed this financial engineering seized up, so did other mortgage markets that had used the same models. The best example of this is the UK which had also adopted most of the same irresponsible lending practices.

First the US property market fell and this quickly caused the market for CDO’s to dry up. Without this way of offloading risk the UK banks had to curtail their imprudent lending practices. With no one able to lend to prop up the rotten edifice, the UK property market also began to fall. Banks around the Globe stopped lending to each other because they all knew that their bookkeeping was suspect, with many being slow to mark to market the toxic CDO’s that where now, at least in the short term, worthless. This caused them to go running into the arms of sovereign wealth funds to shore up their capital.

All this financial turmoil has significantly impacted Global growth to the extent that it was even able to slow the Emerging Market juggernauts of China and India and throw a spanner into the Commodities Supercycle.

Which brings us to where we are now with US government ostensibly nationalizing the two GSE’s that back the US housing market.

You can reasonably expect that since things fell like domino’s that the recovery will be quite similar. The US property market has shown signs that its decline is slowing. Commodity prices and the inflation that they stoked have stalled, which will allow the central banks to change focus from inflation to pump priming.

Expect that the US markets will recover first followed by Europe then Asia and the emerging markets. This will allow the Commodity Supercycle to gain traction again.

So in answer to the question, “Are we there yet “. The answer will very much depend on how you have positioned your portfolio. If you have over weighted the US market you should already be starting to see your portfolio recover. If you still have most of your assets in Europe it will be a long winter. If the bulk of your assets are invested in China, well, see you next year.

Pirate Bankers

Swiss Bankers over the years have built a reputation for probity, confidentiality and a conservative if not staid style for handling their client’s money. Recent events at UBS however have shattered that carefully crafted image and have lent an aura of swashbuckling to the pinstriped gnomes of Zurich.

After an utterly disastrous foray into Hedge Fund Management that culminated in the embarrassing closure of its Dillon Read Hedge Fund unit in May 2007. UBS has become a serial bleeder of red ink. Today’s Quarterly result are expected to be the 4th consecutive Quarter of Large write downs, after writing off $37 Billion in sub-prime assets in the last 3 Quarters, analysts are expecting additional write downs to bring the total to $43 Billion.

Desperate to recapitalize UBS accepted $11.5 Billion from Singapore’s Sovereign Wealth Fund and an unnamed Arab Sheik. This was done on very favorable terms for the investors, if UBS raised more money later in the year they would have their deal re-priced. When UBS subsequently was forced to go cap in hand to market again by doing a rights issue at a 30% discount to its stock price to raise an additional $15 Billion to shore up its dwindling cash-pot, this deal became very lucrative to the new investors to the detriment of existing shareholders. Not surprisingly this has led UBS shares to fall 53% this year the 4^th worst performance of any financial institution in Europe.

Not content with shedding money UBS has also been losing employees almost as quickly. In addition of planned headcount reduction of 7,000 employees, UBS has also been losing entire teams from its flagship wealth management franchise to its rivals. Bank Julies Baer, Sarasin and Cie and Vestra Wealth Management have been some of the beneficiaries.

This lack of confidence has also been affecting clients; UBS is expected to report today a net loss of $4.6 Billion in client funds. This is the first such loss in 8 years. UBS the World’s largest manger of client money with over $2 Trillion in assets must be unnerved by what, in private banking circles, is considered a lead indicator on future performance. The clients only started to shift their assets relatively recently and this may indicate that they are more unnerved by the accusations of criminality at UBS than they are about its lack of apparent investment management skills.

UBS has been sued by the Massachusetts and New York Attorney Generals who are accusing the Swiss bank of committing a "multi-billion dollar fraud" by steering broker clients into auction-rate securities that became impossible to sell once the credit market tightened. It has since had to agree to return $18 Billion in client’s money.

UBS has also been accused of helping US clients to commit tax fraud. A federal judge in Miami has authorized U.S. officials to seek information from UBS AG about U.S. taxpayers suspected of using Swiss bank accounts to evade income taxes, part of a probe that could crack open Switzerland's tradition of bank secrecy. The order issued gives the Internal Revenue Service permission to serve a summons on UBS to obtain information about possible fraud by people whose identities are unknown. The court granted the so-called "John Doe" summons, a day after the Justice Department made what it called an unprecedented request for the records, part of an IRS investigation into services UBS provided to U.S. clients from 2000 to 2007. Nothing seems to scare Private Banking clients like a tax department fishing expedition.