Here’s an interesting read about the possible “blow-up” of OTC derivatives market, suggested by Myron Scholes- one of the three who came up with the Black-Scholes model for pricing options, taken from the Bloomberg website. Some excerpt:
The “solution is really to blow up or burn the OTC market, the CDSs and swaps and structured products, and let us start over,” he said, referring to credit-default swaps and other complex securities that are traded off exchanges. “One way to do that, through the auspices of regulators or the banking commissioners, is to try to close all contracts at mid-market prices.”
Another one from TheStreet.com presents Jim Cramer’s stock-by-stock dissection of the Dow, presenting the worst-case scenario which if it happens he claims could bring the Dow up to 5,320 level. I’m putting up his comment on Boeing (NYSE: BA), General Motors (NYSE: GM), and MickeyD (NYSE: MCD).
Boeing’s balance sheet could be stressed mightily by the huge downturn in aerospace and a cut in defense spending for Boeing-like systems. That means the 5.6% dividend is questionable, and so is the low of $30. With big order cancellations, a place like Boeing begins to lose money, even though it is extremely profitable right now. The stock can drop 20% easily on that news. Make it $24.
General Motors common stock gets canceled in my estimation in a bankruptcy which we all seem to know is coming. Goose egg.
McDonald’s: A strong dollar could cut estimates, as could a decline in traffic in Europe, where MCD has a big franchise, Still, it’s a solid company and a good bet, so I will call it no lower than $45, as dividend protection and great management could cushion any decline. I want to buy this one, too, when it gets to $50, as you have to start somewhere, and the idea of it going to $45 implies a garden-variety worldwide depression.
Finally, a story on Harvard’s financial meltdown, courtesy of Forbes online.
It would have been nice to have cash on hand to meet margin calls, but Harvard had next to none. That was because these supremely self-confident money managers were more than fully invested. As of June 30 they had, thanks to the fancy derivatives, a 105% long position in risky assets. The effect is akin to putting every last dollar of your portfolio to work and then borrowing another 5% to buy more stocks.
Harvard has oversize positions in emerging market stocks and private equity partnerships, both disaster areas in the past eight months. The one category that has done well since last June is conventional Treasury bonds, and Harvard appears to have owned little of these. As of its last public disclosure on this score, it had a modest 16% allocation to fixed income, consisting of 7% in inflation-indexed bonds, 4% in corporates and the rest in high-yield and foreign debt.