Simple Strategic Arithmetic formula for Property Developer

Let me use a simple arithmetic example that we learnt from our primiary school to illustrate the mindsets of the property developers how to show their hands in the Land Auction.
If you have 100 units of $12 dollar each and to add marginal auction units by 15 at cost of $15 each, the marginal addition will increase the units to 115 and the total costs to $1,425.
The implication is big here. If the auction price can push up the market price from $12 to $15, the increase is 25%, it means the profit of the original 100units will increase by 25% or $300 which is more than enough to cover the costs of the newly additional units or simply speaking it is only just a zero cost to acquire these additional new units.
The auction yesterday was clearing proving of the above fact. Cheung Kong was bidding up the land at a very high price which to the outsider were puzzled why they bought at around $10,000 per sq ft and if taking into accounts of the building costs the sales prices need to be at least 14,000 or above in to order to make a profit which were way above the secondary market-flour is more expensive than bread. But if you can think the logic from the above simple arithmetic, you know the reasons why. While pushing up the auction or market prices, at the same time they were lifting the market prices of their underlying holdings in their books too. It shows the facts that the property developers have grown to the sizes that any simple policies by the Government are no longer easy to have their desirable effects to cool down the property markets. On top of that, if we look into their financials, the property developers are now so strong that can weather any adverse market moves or tough policies put forward by the Government. The ball is now in the court of our Upper Albert Road and wonder there are someone wise and bold enough to counter the balances of these powerful, greedy & fierce giant developers.

Bank Reform Proposal in US

The sure win of special Senate election in Massachusetts state last week turned out to be a big surprise to the Democrats and of course a big headache to Obama. This state has been under Democratic Party for more than 50 years and was a true supporter of Obama's Adminstration. Since this election puts the Democrats in Senate under 60 votes, Obama is under big pressure in the latest proposal Medical Reform Bill that he once thought could push it through without major obstacles. The election in Massachusetts is amused by the public as a 50 后靚模 Martha Coakley who was wrong picked by the Democrats to lose out to a not a well known rival Republican Scott Brown. The last week proposal of bank reform was a political move of Obama to win back some of the public opinions after the defeat of this election. As we all know, the bonus issue of the big banks have posed a serious negative image on Wall streets and the Adminstration. People think the bankers are too greedy and should feel disgusting to get the bonuses. Their survival were not coming from their performance rather they are from the money of the taxpayers. Given the situation, Obama changed his stance to lean towards Volker who has been ignored since he took office and now back to the spot light again. Volker is in favor of heavy hands on Wall Street which is quite an opposite to Geithner who thought of otherwise. Volker suggested steps included to limit the size of the banks, disallowing banks to invest own funds in Hedge Funds and stop proprietary trading which all of them are not easy to implement. Unless other countries are going to follow the same, just unilateral action by US could only let the business to go away to their competitors-EURO and Asia.

HSBC-between hard and rock place

HSBC is now in a very difficult situation in face of its capital requirement. The passive and silence of capital raising rumors for almost a month have done nothing good to HSBC and its share price. There are not many choices left on the table that can be considered. They could either have to raise capital at the current reluctant share price at HKD60 or to sell its Assets. If to sell US assets is not possible due to technicalities in terms of markets and buyers, then to kill chickens that could lay the golden eggs seems to be inevitable. If to step into the shoes of the Management of HSBC, I would suggest the strategies either to sell part of the stakes in Bank of Communication or Hang Seng Bank. If to choose between these two banks, I think Hang Seng Bank is far better to sell than the Bank of Communications given the current banking environment for running business in Hong Kong is not good at all. To make decent profit is not something easy. After all, there is no need to have two big banks competing side by side in such a small economy like Hong Kong. If to sell partly of Hang Seng Bank, it is going to be a big relief to HSBC since its 62.14% stakes in Hang Seng Bank could raise funds up to US13.4 bio that could bring their capital ratio up to a more comfortable level. Though it is not a direct right issue or share placement, the effect on the capital ratio is not something direct, certainly it is a big help to the bank. For the Bank of Communications, the China Market is too huge to miss and if to find another Bank like this as strategic partner in future is almost impossible. So, for strategic management, to sell Hang Seng Bank should be on the top of the list unless there are some other chickens that we have missed inside the Bank.

Hero

Impossible is now possible!!

There is always miracle happened when one is in fear and despair.

Hope the newly sworn in President Barak Obama can help the American out of the dark to have a smooth and safe landing like what the pilot hero Chesley Sullenberger has done over the icy Hudson river.

Who am I ?

I can easily walk into the council but I cannot walk out with no problems.

I can end the debate inside the council but I cannot end the greivances outside.

I can set my answers for the questions but I am not sure these are the answers of the questions.

I can peg our currency but I cannot peg the price tags in our supermarkets.

I can pay for my political appointments but I cannot pay for the hearts of my people.

I can say to do best of my job but who can I trust to do best for my people.

Can you tell me what to do??

What tempts you to buy from Zara?

Zara, the latest famous brand name in the fashion field, has been growing so fast that no one should miss this name. Their fashions are of big sell that their shops either in London, Barcelona, Hong Kong and many other countries are always seen with people that line up to buy their goods.If you know how they run their business and their size of operations, probably you know why they are so successful.

Zara has more than 400 designers who fly all year round around the globe to grab on every latest fashion trend information on the ground. Their factories in Spain have the size equivalent to 90 standard soccer fields which connected together like the spaghetti on our dish. On top of that, the time from design, manufacture and logistic transportation from factories to the shelves is only 12 days compared with normal cycle of 90 days in the industry.

To beat their competitors, Zara has the well known formula to win by size of operations, in speed of delivery time and designs of products are always up the very last moment. If to beat them back, one must have the competitive advantages over Zara or other values that Zara cannot be delivered. If you know the story about David and giant Goliathe, there is no one in the world that cannot be unbeaten. If not, it is better to join their party.

Why there is a subprime loan crisis.

Last week a friend raised the questions on the subject of subprime loan problems in the US. He asked me why the problems were so serious and said crisis of such size to the financial markets had not been seen for many years. Also, he was amazed why the big names like CitiBank and many other, though reluctant, have to go overseas to seek for capital injection. Also, Bear Stearns bailout by JP Morgan Chase had surprised many.

Though related, I try to avoid discussing on the advanced credit risks models such as JP Morgan Creditmetrics model, Credit Sussie's CreditRisk+ model or Merton's KMV model. It is because they are too complicated and too quantitative for most of my readers to understand. Also, this topic and their extension to the regulatory capital and economic capital of a bank are so wide that a blog is too short for it.

Instead, my blog this time will focus on the qualitative side of the credit risk management. There are five main causes that I think of which account for 85% of the crisis.

The first one is superstitious. There was no real downturn of real estate market since the Second World War. It is because of this long perception, most people believe that the direction of the real estate market is only up and no down that made the bankers were very relaxing in their mortgage lending.

The next is the culture. The shareholders and Institutional Investors of the Banks have a high demand for short term performances. These gradually changed the landscape of lending cultures of the banks by emphasising on short term return and tolerating higher risks on the long end of the balance sheets.

Thirdly is the incentive packages to the bankers. The bonus is normally tied to the performances, while higher returns are commensurate with higher risks. So, to aim for bigger bonuses, the bankers are encouraged to go for higher risks business at the expenses of the shareholders.

Fourthly, most banks are relying on the external rating agencies to assist them in rating the Mortgage Back Securities (MBS) and Collateralized Debt Obligation (CDO)in their investment portfolios. So, if there is a lending problem, it is not just a one to one single problem but it is a problem for all the banks at the same time.

Lastly, the credit derivative markets such as credit default swaps and credit spread options etc have been expanding so fast that the contagion is easily get out of hand. The domino effect could spread quickly from one bank to another which could easily collapse a financial system. That was why the Federal Reserve had to take quick actions to stem the spreading by involving into the deal of Lehman Brothers, yet risking the allegation of encouraging moral hazard among the banks.

Though the subprime problems are still overhanging the financial markets, I think we have seen the worst already. It is a painful experience to learn from it but it does help the bankers to minimize committing the same mistakes again.