Asian Markets Fall With The Nikkei Down Over 3.5%

Financial and insurance stocks lead the way:

March 6 (Bloomberg) — Asian stocks fell, dragging the regional benchmark index to a fourth weekly decline, on renewed concern losses at financial institutions will mount as the global recession deepens.

HSBC Holdings Plc, Europe’s largest bank, sank 2.9 percent after CLSA Asia-Pacific Markets cut its share-price target and Citigroup Inc.’s stock fell below $1 for the first time. BHP Billiton Ltd. dropped 2.9 percent in Sydney after oil and metals prices retreated. Honda Motor Co., which gets more than half its sales from North America, lost 4.9 percent after the Japanese currency rose against the dollar.

“People haven’t yet understood the full depth of the financial crisis,” said Yoshinori Nagano, a senior strategist at Daiwa Asset Management Co., which oversees about $96 billion of assets. “Should regulators assess banks’ assets under stricter conditions, quite a few of these companies may be effectively insolvent.”

The MSCI Asia Pacific Index dropped 1 percent to 72.37 as of 7:31 p.m. in Tokyo, following a two-day, 1.8 percent gain. The gauge lost 4 percent this week, taking declines in the past year to 50 percent, as the global recession pummeled profits at companies including BHP and Honda.

Japan’s Nikkei 225 Stock Average slumped 3.5 percent to 7,173.10. Hong Kong’s Hang Seng Index lost 2.4 percent, while Australia’s S&P/ASX 200 Index fell 1.4 percent. All Asian markets declined except Taiwan, India and Sri Lanka.

Mounting Losses

Elpida Memory Inc., Japan’s biggest memory-chip maker, slumped 11 percent on concern a possible rescue plan for the company may be delayed. Bukwang Pharmaceutical Co., surged 7.8 percent in Seoul after receiving approval to sell a hepatitis drug. Manila Electric Co. climbed 13 percent on speculation its major shareholders are vying for control of the utility.

Futures on the Standard & Poor’s 500 Index dropped 0.5 percent. The U.S. gauge slid 4.3 percent yesterday to the lowest close since September 1996, led by financial companies. Shares of Citigroup, once the world’s biggest bank by value, tumbled to 97 cents before closing at $1.02, bringing this year’s decline to 85 percent.

“Citi below $1 shows we are still far from the exit of this U.S.-originated global financial crisis,” Kiyoshi Ishigane, a senior strategist at Tokyo-based Mitsubishi UFJ Asset Management Co., which oversees about $61 billion., said in an interview with Bloomberg Television.

Raising Funds

The global credit crisis sparked by a U.S. housing slump has caused almost $1.2 trillion of losses, prompting government bailouts of banks including Citigroup. Lloyds Banking Group Plc is close to an agreement with the U.K. government that would leave it state-controlled, the Financial Times reported.

HSBC sank 2.9 percent to HK$43.50. The company’s share- price target was cut to HK$28 from HK$41 at CLSA amid concerns some borrowers will fail to repay their loans, a report dated yesterday said.

The London-based lender announced plans on March 2 to raise 12.5 billion pounds ($17.7 billion) in the U.K.’s biggest rights offering. HSBC said it will eliminate 6,100 jobs and close U.S. consumer lending units after subprime losses cut profit.

Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank, dropped 4.8 percent to 401 yen. Mizuho Financial Group Inc., Japan’s second-largest bank, slipped 4.9 percent to 176 yen.

Bank of Japan Deputy Governor Hirohide Yamaguchi said the central bank may need to expand its purchases of corporate debt to prevent a credit shortage as the recession deepens.

Worst Performers

A gauge of finance stocks on MSCI’s Asian index lost 2.2 percent today, the most of 10 industry groups. The finance gauge is also the worst performer this year.

“We’re still in a bad-debt cycle that hasn’t fully played out yet,” said Hugh Dive, who helps manage about $3 billion at Investors Mutual Ltd. in Sydney. “Banks are the blood of the economy, but no one could say the write-offs we’ve had so far are as bad as it gets.”

Stock declines in the past year have erased about $30 trillion from equity markets worldwide. The average valuation of companies on the MSCI Asia Pacific Index dropped by 7 percent in that time to 13 times reported profit.

BHP slipped 2.3 percent to A$27.65 in Sydney after a measure of six primary metals traded in London declined 1.6 percent for the first slump in three days. The company had its earnings estimates cut by Merrill Lynch & Co. because of declining metal prices.

Inpex Corp., Japan’s largest oil explorer, lost 3.7 percent to 620,000 yen in Tokyo after oil fell 3.9 percent to settle at $43.61 a barrel in New York yesterday. Cnooc Ltd., China’s largest offshore oil producer, slumped 3.2 percent to HK$6.08.

Rescue Package

Honda Motor, Japan’s second-largest carmaker, fell 4.9 percent to 2,150 yen in Tokyo after the Japanese currency strengthened to as high as 97.72 yesterday versus the dollar from a four-month low of 99.68 earlier. Toyota dipped 2.9 percent to 2,900 yen.

“The weaker yen provided support for Japanese equities, and that’s dissipated,” said Mitsubishi UFJ’s Ishigane.

Elpida tumbled 11 percent to 544 yen after the Nikkei newspaper said a possible rescue package involving Taiwan’s government may be arranged later than the company projected. Elpida had hoped to gain a package with Taiwan’s government by the end of March, the Nikkei reported today.

Bukwang, a South Korean drugmaker, jumped 7.8 percent to 17,300 won after saying it will sell Levovir, its hepatitis B medication, in the Philippines from June. Bukwang said it expects approval as early as this year to start sales of the drug in Malaysia and Thailand.

Manila Electric rose 13 percent to a record 126 pesos, rounding out a four-day, 41 percent rally. San Miguel Corp. Vice Chairman Ramon Ang said yesterday his company hasn’t added to the stake it agreed to buy last year. San Miguel said it would purchase 27 percent of the utility in October and took four seats on its board in January.

“It’s still the speculation, that’s what’s driving share prices right now,” said Paul Jeffrey Lu, an analyst at Citiseconline.com in Manila. “It’s exceeded my fair valuation for the stock.”

Great job Mr. Taleb: 236% in 12 months

March 6 (Bloomberg) — 36 South Investment Managers Ltd., a New Zealand-based hedge fund firm set up by derivatives traders, will close its Black Swan Fund after it gained 236 percent in the last 12 months and start a fund that wagers on inflation.

36 South will move to London from Auckland in May to boost its assets under management as investors have overlooked the manager because of its location, said Jerry Haworth, co-founder of the firm that manages more than $40 million.

“It’s easier to trade from London than in New Zealand,” Haworth, 49, said in a telephone interview from Auckland. Europe has “a really concentrated pool of potential investors; it makes more sense if you’re serious about raising money to go to London.”

The $1.4 trillion hedge-fund industry shrank by more than 20 percent last year and averaged losses of about 19 percent, the worst year on record, according to Chicago-based Hedge Fund Research Inc., as the credit crunch led to investor withdrawals and funds shutting down because they couldn’t raise new money.

36 South buys long-dated options it considers cheap in global currency, fixed-income, equities and commodity markets, betting that rare and unforeseen events would generate unusually large profits. It doesn’t invest in options with less than a year to maturity.

Options, contracts to buy or sell shares by a certain date at a specific price, “serve as an early warning system for an impending crisis,” Haworth said. “It’s an amazingly lucrative niche and there are very few players in it.”

Making Money

The Black Swan Fund profited from bets on interest-rate cuts in Australia and New Zealand, and the purchase of put options on major stocks around the world, including the so- called BRIC nations of Brazil, Russia, India and China, Haworth said. The manager also bought put options on commodities. Put options gives the buyer the right, though not the obligation, to sell a specific quantity of a security by a set date.

The MSCI World Index tumbled 42 percent last year, its biggest drop, while the Reuters/Jefferies CRB Index of 19 raw materials lost 36 percent, the worst rout in 50 years.

“What can I say? They made a great deal of money,” said Peter Douglas, principal at Singapore-based hedge-fund consulting firm GFIA Pte, which runs a unit that invests in hedge funds. “We were invested in Black Swan, which made our clients happy. It was conceived and executed as a disaster hedge, and clearly last year was full of disasters.”

Black Swan

36 South plans to close its Black Swan Fund within the next two months and return the money to investors as options are now “very expensive” and are unlikely to produce “significant returns,” Haworth said.

“The market has gone from under-pricing risk to over- pricing it,” he said. “On a risk-reward point of view, I can’t put my hand on my heart to investors and say ‘listen, this is a good investment to be buying options at this juncture,’ because I don’t believe it.”

The fund, named after a theory developed by Nassim Nicholas Taleb, a professor of risk engineering at New York University, sought to protect client investments against “black swans,” those highly improbable events that can cause havoc. Taleb wrote a book called “Black Swan: The Impact of the Highly Improbable,” published in May 2007.

36 South will start a fund in the second half of the year that will return “well over 100 percent” if there’s “significant” inflation worldwide, Haworth said. Billionaire Warren Buffett said in his annual letter to Berkshire Hathaway Inc. shareholders Feb. 28 that U.S. bailouts will likely lead to “an onslaught of inflation”.

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Today’s Earnings

Does GE have a target on its back ?

If GE Capital were a bank, it would almost certainly be insolvent (GE).

The company has $661 billion of assets and only $53 billion of equity. If its assets were marked-to-market, like those of banks, it is hard to imagine that the losses wouldn’t wipe out GE Capital’s equity. All it would take would be an 8% writedown–in a global debt collapse in which some assets are now worth pennies on the dollar.

So what happens now?

A few possibilities:

* GE muddles through. It shrinks its asset base gradually, uses cash flow from its industrial and finance businesses to cover write-downs and losses, and eventually emerges from the crisis a shadow of its former self. Of course, while it’s doing this, it won’t be snapping up cheap businesses, building its industrial operations, and pumping hundreds of billions of dollars of new credit into the economy the way a robust GE would. At least it will control its destiny, though, and not become a national embarrassment like Citi and Bank of America.

* GE raises tens of billions of new equity from the private market. Possible, but unlikely. And getting tougher and more expensive all the time. Having vaporized their capital by falling for the “just trust us” assurances of the collapsing banks, global investors are understandably skeptical of any company that claims its capital position is strong.

* Taxpayers bail GE out. Tim Geithner and Jeff Immelt meet in some secret back room and hash out a plan whereby the taxpayer backstops GE Capital’s losses and the western world is saved. Something tells us that this one won’t go over too well. The public has already had it with bailouts and Geithner, and the idea of bailing out a company that still throws of tens of billions of dollars of cash a year from an industrial business might be the last straw.

Which one will we choose? Probably A or C. But we’ll cross that bridge when we come to it. In the meantime, back to Platitudes, Assurances, Denial.