The Fall of MF Global and the Greece Issue

MF Global Holdings is the latest of the high profile bankruptcies that I had been reading on. In many ways, its fall was quite similar to Lehman Brothers. I attributed its collapse to two main cause – overleveraging and weak economic environment. MF Global was a brokerage firm. It was supposed to execute orders for its clients and earn fees from this trades. However, it also began trading its own deal as a way to supplement the incomes from those fees. During good times, this was well and the employees enjoyed good bonuses but recent months were not good times. MF Global fall, while other brokerages are still standing, because it has overleveraged on its assets. Its methods of execution was similar to the pre 2008 crisis, it still take massive risk and leverage on a relatively narrow investment.

According to Forbes’ Robert Lenzner, MF Global has leverage ratio of 82 to 1! It owned $41 billion in assets, against which it apparently had $39 billion in debt and an equity value of $500 million plus $325 million of investment grade debt. When Lehman Bros fell in 2008, it was levered up only to 30.7 times, already a very shaky position to be in. Also, CEO John Corzine apparently was buying short term Euro debts on the chance that the Euro would recover and his investment would pay off big. I don’t know if he is oblivious that many smart money hedge funds are taking the opposite view, shorting the Euro debt when they could. Not to say that this contrarian approach is not recommended. John Paulson did it with the subprime crisis and it pay off – a lot, but he has the data and understanding to back his positions. So, was John Corzine faulty in his analysis? Perhaps, or perhaps not? He might be right that the European financial market will rise again, but in this case, his timing is way off.

The reason behind this plight was Europe’s weak economic outlook, in particular Greece. Isn’t it an irony that financial crisis occurred because there is too much confidence, too much spending and too much borrowing, yet the solution to get out of the crisis is more confidence, more spending and perhaps more borrowing. I assumed that the bailout fund was enough to buy a little confidence and more time for Greece to settle things out. Then, the Greek Prime Minister George Papandreou pulled out a shock yesterday by having a referendum on the latest aid package to solve its debt crisis. He is asking his people to vote for the next move because this is all political. His public approval was very low due to austerity measures from EU’s pressure to handle Greece debts but the people itself do not necessary want to move out of the Euro Zone. Basically, he is saving his seat of power, but sacrificing his country in return. This shatters any lingering confidence that investors would have in Greece and reflected badly on the Euro block. A referendum takes time to complete, time that financial markets do not have. PM Papandreou is negating other countries goodwill and sacrifices in helping out Greece.

After all, this trouble started because Greece cheated about its borrowing statistics to gain entry into the Euro in the first place. And now, it is expecting other countries to clean up its mess but rejecting their help at the same time! I don’t like this at all, this is leaving a very bad taste in my mouth.

Dell Customer Service

I had been away from the blogging scene for some time. It wasn’t because I was particularly busy, but my laptop was sent to repair at the Dell Depot Center. A little story about this current laptop of mine. I bought it last December after I  had accidentally spilled ramen onto desktop replacement Asus at that time. It was a heartbreaking moment for me because the Asus was relatively new, didn’t offer me any hint of problem at all and expensive because I wanted upgraded gizmos on it. Then, I bought this Dell because I felt that it was a good deal. Dell laptops have pretty good specifications at lower pricing.

A little after a month of purchase, the sound suddenly stop coming out from the laptop. That’s odd, I wonder. So, I began tinkering with it for a while and reinstall a new audio driver which solved the problem. Everything was well and I was quite satisfy with the laptop. It lasted me through classes and everything. A few months after the first audio malfunction, it happened again. This time, I redo the whole procedure and the sound was back on again. Then, just around three weeks later, the audio finally died. The symptoms are just the same, there’s no sound coming out of the speakers although the computer system is indicating that all is fine. I tried reinstalling the driver but it did not work this time. Frustrated, I seek technical support from Dell. They have a nifty little trick that allows their technicians to diagnose the computer system by allowing them to take control of the computer. I like how they use this technology especially to help out those that are tech illiterate. The technician decided that it might be a hardware problem and send me a box to bring it back to their Depot Center.

Now, there’s a little problem with this. Apparently, the operator forgets to include my apartment number, which cause the delivery to fail each time. Only on the third delivery did the box manage to reach me although I repeated my address to them each time the box did not reach me. So, the box was sent there with expected delivery back to me in 13-15 days. After waiting for more than a week, I was starting to get worry because I ‘m planning to leave the country and want a computer by my side. I called the customer service asking them to ship my laptop back. Turns out, they did not do any repairs on the laptop. I asked for it back and they did promptly return my laptop, although that was also a day later than when I expected it.

The problem with the laptop? Turns out that Dell technicians diagnosed it as a liquid spill problem on the motherboard. It was not covered in the standard warranty and they would charge me  a lot just to replace the motherboard. Now, remember the case with my previous laptop? I was traumatized by that spilled that I would not leave any liquid for long nearby this Dell. So, how did some liquid make its way into the motherboard when I make sure that there are no liquids in its surrounding. I am dissatisfy with the answer they gave me. If there was indeed liquid spilled, why was it that only the audio in my laptop was gone, and not the rest of the system, like my previous Asus. I’m planning to send it out for another repair shop when I’m overseas and let them check out my computer. If it turns out that it could be repaired, there’ll be hell. Well, no. Just that I’ll probably won’t buy from Dell again.

Entrepreneurship & Guts

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(Shanghai, China) Always have a dream in sight and reach for it.

Not sure if I ever mentioned this before but during my last semester in college, I took up a course on Entrepreneurship and its semester long group project involved writing up a credible business plan, one that someone could actually bring it out and make it work. My team decided to focus on E’s dream because that’s what she hoped to start after graduation and because it seemed the most plausible to success. I had a great time in the team, and produced a fine business plan that I believed the professor was even happy with. Heck, I was so proud of the final project that I kept it on my desktop until now to remind me of it.

Well, several weeks ago, E informed me that she had submitted the plan into a business plan competition and made it all the way to the final round for the grand prize of $10000 and numerous other misc. support. She’s one step closer to starting that dream business of hers. And all this because she had the vision of what wanted and the guts to push it one step at a time. Why am I writing this now? Well, the final round is just round the corner and I’m rooting for her.

GIS Taiwan 2011

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(Shanghai, China) Ping An Insurance – Wow, it’s headquarter is extremely beautiful.

I’d been accepted to the GIS 2011 conference again. I’d attended it during 2009 and meet great friends, and interacted with smarter peers. This year, my entry was among the ten best entries and there was supposed to be additional incentives to the one on paper. Unfortunately, just like last year, scheduling was a thorn to me and I had to forfeit my participation this year. Well, the the participants this year, enjoy the conference and if anyone is thinking of it next year, http://gis-taiwan.ntu.edu.tw/

Also, to let you guys know some of the side projects that I will be up to. First would be to improve my physique. I’m saddened by what I have, or should I put it, lack off and had began building up my body. However, my motivation tends to wane at times and I had to restart repeatedly after pausing a couple days. Hopefully, there will be a new and improved me after a couple of months.

I had also began training myself in the art of Excel and some other software. I am aiming to be just as proficient in these software as those first year investment bank monkeys (oops) by the time I’m done with it.

Young, gifted and blocked

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Korea needs fewer wage slaves and more entrepreneurs

EARLIER this year Humax, a maker of digital set-top boxes based in Seoul, announced that its annual revenues had exceeded 1 trillion won ($865m) for the first time. For South Korea, this is something of a milestone. Humax is a classic start-up, founded in 1989 after a chat between engineering students in a bar. Alas, scandalously few Korean start-ups grow this big.

The Korean economy is dominated by the chaebol, huge conglomerates with tentacles in every stew. The biggest, Samsung, accounts for around a fifth of the country’s exports. Although the chaebol have played a vital role in South Korea’s development, they also suck up credit and obstruct the rise of start-ups. “Everyone knows you don’t compete with the chaebol” is a commonly heard refrain.

Parents of bright young Koreans typically steer them into steady careers in the chaebol, the government or the professions. As in Japan, being a salaryman (or woman) is far more respectable than running one’s own firm. “In Korea, stability is everything,” says one such parent.

Widespread youth unemployment is changing that calculation, however. An impressive 58% of Koreans aged 25-34 have attended university, but 346,000 graduates are currently out of work, up from 268,000 two years ago. Some become entrepreneurs out of necessity: almost 30,000 young South Koreans say they want to launch their own companies, one survey found. And according to the government, the number of “one-man creative enterprises” in the country has risen by 15% in the past year, to 235,000.

Young entrepreneurs often favour tech fields such as social media or gaming, where the only barrier to entry is the power of your imagination. Challenging the chaebol at, say, shipbuilding, might be trickier. The previous wave of young entrepreneurs—a result of the first internet boom, and the unemployment that followed the 1997-98 Asian financial crisis—threw up fizzy firms such as NHN, the operator of Naver (the “Korean Google”), and NCsoft, a maker of multiplayer online role-playing games. Each was once tiny but now belongs to the trillion-won club.

These new entrepreneurs are being joined by a growing band of foreigners, including ethnic Koreans from Western countries. Californian Koreans see no stigma in starting your own business. And they see South Korea, where the economy grew by 6.2% last year, as a land of opportunity compared with sluggish America. The country issues about 35,000 investor visas a year, mostly to small-scale entrepreneurs. The Seoul Metropolitan Government’s Global Centre has recently been swamped by expats seeking to attend its classes on Korean business procedures and regulations.

The city has also launched a “Youth 1,000 CEO Project”, to provide young entrepreneurs with free office space and grants of up to 1m won per month. South Korea’s President Lee Myung-bak grumbles that Korea has no Mark Zuckerberg (the baby-faced founder of Facebook).

The problem, though, is not young Koreans, who are both bright and energetic. Nor is it business-throttling regulations: South Korea does better on that score than Japan or Taiwan, says the World Bank. The real obstacle to enterprise is a society that urges its best young minds to aim low.

Source: http://www.economist.com/node/18682342?fsrc=scn/fb/wl/ar/younggiftedandblocked

This article struck a chord with me. It reminded me of a course I took not long ago with Professor Baak. Perhaps, it might be interesting to let the readers know that the topic of the course was about the Korean economy. Professor Baak was likable, enthusiastic about teaching and has a quirk to impart his life knowledge to the listeners in class. Mostly, he would always advised us to find prestigious jobs to secure a stable future. Just like in the article, Professor Baak viewed the world through his cultural lenses: The need for a stable job to provide for the family.

Professor Baak was himself a product of recession, a phd student looking forward to his first job when the Asian Financial crisis struck and he needed to move from his homeland Korea to Japan to secure a teaching position. From there, he moved from a smaller Japanese university to a larger and more prestigious Waseda University. Undeniably, he was influenced the Korean and Japanese culture that securing a job is more important than paving into the unknown.

If he mentioned this to me several years ago, I would have agreed wholeheartedly with him. I am sure my parents would have agreed as well. But since coming to the States, I was amazed by the drive that the culture here has in cultivating independence and freedom. Not surprisingly, I found myself increasingly rejecting the notion that having a cushy comfortable position is the most important goal in life. Over time, I found myself increasingly accepting to the notion of doing what I am passionate about, and not following the mold that others has set aside for me.

Also, I feared for the future that is me when I returned back to Malaysia. The culture back home (or at least my environment) is suffocating where the society dictates that the best minds will seek the highest paying employment. Few ever break the mold and seek out their own ventures. Even in Malaysia, the stigma holds that being a salaryman is more respectable than a business owner. I saw Korean classmates, smart and caliber, heading back to Korea to take entry positions in the chaebols. However, none of them ever mentioned about returning home to start their own enterprise. (The classmates I surveyed are those who are raised in Korea and not the Californian Koreans mentioned in the article.) Not that I condemn seeking positions in these companies, I understand how alluring these positions are especially for entry level grads like me.

When Professor Baak talked about in class, he mentioned previously that he taught a heir of a zaibatsu (Japanese version of the chaebol) whom he has no idea of his background until that student asked for a recommendation letter from him. In class, Professor Baak seemed happy and in awe when talking about the young man, possibly thinking about that man’s bright future who might inherit the helm of the zaibatsu leadership. Yet, I kept on wondering, why didn’t he take pride in dreaming of starting his own zaibatsu instead.

p.s. I’m aware that I might have to eat my words in the future and this post might bite me.

Competitive Strategy Game: Week 8, 9 & 10

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(Washington DC) Home to American policies’ decision making

Almost a month had passed by since this game ended. My memory of the thought process that went into making the decisions is a little hazy by now. After Week 10 results are announced, the cost for each tram was finally revealed to others. We looked back at how the costs affected the entry decision of each team: which cost that truly matters and how some teams managed to bluff their way to immense profit despite having higher costs structure than the other teams.

I will summarized the collective action of our team into the following thoughts:

  • By this time, our team is quite profitable and (in hindsight, we grew complacent). We do not know the profits that other teams are having or the range that participants in previous games had achieved. Steps were taken to make sure that such information was not freely transferred between the participants. Hence, this show the benefit of market research, it gave further insight into the market and competitors to allow better decision making. We stick to our initial markets, not foraying into any new markets considering the short remaining periods left.
  • As our capacities are expiring, we decided not to renew them because the depreciation for earlier periods are not worth the initial investment gains. We saw our market share in each market dropping as another firm increased its capacity and began undercutting the rest. That impudent fool! I was a bit slighted because the new entry disturbed the market power and reduced the dividends that we had been enjoying. In retaliation, we did not pick a fight with the new entry. Instead we conceded our market share and raise prices continuously to keep our revenue steady. Now, I understood how those big firms felt when uprising new startups began digging into their own market share.
  • Because we are flushed with cash by now, I made suggestions to enter another market, but perhaps because of my weak argument and my own belief that investing this late who do us not much better, we decided to sit on our cash and wait for the remaining period to expire.

Results:

  • The results was announced and turns out, there a twist to this game. Turns out that in order to achieve the highest profit, the winners had been consistently invested in one market. That was the key behind gaining immense profit in this game. I learnt that this is comparable to the real world, why some companies grew to multinational level while others remained mom and pop stores. The answer was in the different markets that each company invested in. To rub salt into the wounds, this aforementioned market was not originally that appealing to us but it was also the market that I had recommended to enter earlier.
  • My team was in the third place out of the rest of the teams. As consolation, the professor mentioned that my team was the most profitable team who has never invested in the aforementioned market. The first place team gained roughly almost 8 million, second place had 5 million while we earned 4.6 million over the initial investment of 1 million. The teams after us barely break beyond 1.5 million threshold. Our team has the smarts to extract the most surplus out of our markets but not enough to identify the most promising growth market. In addition, the professor even put up quotes that we had written in our reports: “Those who don’t take risk don’t drink champagne!”
  • Ironically, the first place team had rather high cost in the profitable market and managed to overcame this by producing beyond their capacity. They are willing to incurred additional cost just to sell more goods. I had been considering this tactic before and practiced in our markets but their was done at a much grandeur scale.  In the end, they revealed that they had done the calculations and concluded that they would be profitable enough to justify for the additional expenses. Indeed, they took a calculated gamble and it paid off. I even joked that the team deserved the first place because they had two mathematicians in their team while we only had one: me. I observed that the teams that had great returns all had a few members with mathematical background like me. This reinforced my belief that good decisions should be made with good data support. The top teams are able to made it this far because they could calculate the returns from their investment in aiding them to make investment decisions.

Still, this was an interesting competition and I learnt a lot about making decisions here. Making decisions appears easy on book but it is different in real life. There is often much more at stake with the decisions made in real life. A key reminder for myself is to always prepare beforehand and speak up.

Graduation

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(Ann Arbor, Michigan) Big Stadium – The Michigan Difference

For today, goodbye.

For tomorrow, good luck.

And forever, Go Blue!

I had been slow updating about my life recently. It was not the lack of content, rather the lack of willingness to sit down and start typing it out. Also, another tidbit to add here. I am officially a graduate of the Class of 2011, majoring in Actuarial Mathematics and Economics. With my International Studies major dropped, I decided to graduate a year earlier than intended almost impulsively. I had mulled over this decision within the past two months and was still indecisive until the last moment.

With that, my summer plans had suddenly gone awry because I did not take into account that next Fall, I do not have university to go back to. Hence, I am currently a job seeker and if you have any recommendations, do let me know. Time to get out of the college bubble and start supporting myself. This summer, I decided to forgo part of my extensive vacation, opting for a quick post graduation trip with my parents instead. I will use the remaining time to figure out my plans for the future, brush up on more technical knowledge (with learning new programming language in mind, recommendations please), and perhaps set up some passive income for sustenance.

I will update future post with my Strategy game ‘s results.

BP Trading Simulation Challenge

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(Sandusky, Ohio) Crash and burn.

I saw the BP’s participation certificate tucked somewhere on my table and decided to recount the event that occurred few weeks ago. BP came to campus and provide a trading simulation exercise on crude oil. It was supposed to be a competition among all the participants doing thee simulation. I teamed up with Has for this challenge. I had some prior experience doing some virtual trading and analysis before so it should be in my favor to be ahead of others. Indeed, as soon as the simulation started, we start out small by longing and shorting to fell the market around. Has and I are rather passive players. We will hold a position and wait until we earned a profit. With 10 minutes left in the game, we locked in around $12 million in pure profits. But hold strategy was no longer working for us in the final moments, we ended up reducing our profit by $3 million, but I was adamant to recoup those losses till I forgot about the time clause. The time runs out as I was trying to close my account. Still, I had $9 million in the bank, so it should be okay right, wrong! Because I didn’t managed to close the account before time ended, we were penalized $43 million from our holdings. To make matter worse, earning $9 million would still make us ahead of the market by a large margin because the runner-up (who won the game because of our penalty) only earned $2 million, while the rest of the participants all lose money or are just barely scraping through. I should have not gave up on the forest just for an additional tree, a key lesson that I should not be myopic in chasing small profits and forgot about the things around me. Rubbing salt into injury, Z came and congratulate me, “Hey, at least you know you’re the best trader here.”

FYI, my virtual portfolio last year earned more then 100% return. It’s just that I do not have the guts to put in real money to play, unlike A and H.

Competitive Strategy Game: Week 6 & 7

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(Boston, Mass.) Chapel within Boston University.

Basically, there are not a lot of changes within this two period. Each firms are playing cat and mouse with each other. My group has been trying to undercut each other in the effort to drive other firm out of the competition. Considering the short period of time left, this is a futile act. I am wondering whether the other firms who take the low production high price route might fare better within the time period. Considering Market A, I finally gave the white flag and resigned that I could hold much of the market share, allowing the price to rise higher so that we could gain more revenue. In Market B, our presence was so strong that the market leader gave up and cut their production, pushing us into the leading position. This market differentiated taste is hurting us significantly though because it is hard to convert the rest of the market share despite the low cost allowing me to reconsider whether my expansionary plan was a good one. Nevertheless, Market B is a good revenue generator which has provided enough ROI.

Competitive Strategy Game: Week 5

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(Providence, Rhode Island) Fear not the ambiguity that lies in front of you.

Market update for the previous period produced a lot of headache, for me especially.  We were too greedy in Market A and did not expected another new entrant to undercut us so much as the was an equilibrium with other firms in thee previous periods. There was also a huge capacity investment by that entrant. Our reasoning behind why the low price and huge capacity investment was to kick us “old timer” out of the market. Was it predatory pricing, I’m not sure but the possibility of them recouping their losses is slim if they continued on like this. As a result, we sold less than half of what we produced. Market A now looks utterly too competitive and not desirable to continue on. Yet, we believed that we should teach the new entrant a lesson, and cut our price significantly for two reasons: sell our inventory at a loss to cut down on inventory costs and to give the new entrant a taste of what it meant to have your market share taken away. Our profit margin is almost nonexistent with this pricing scheme but we believed we could progress with it for now.

In Market B, we sold off everything and learn something new about producing beyond our capacity. Our main revenue generator seems to come from Market B instead of A like initially predicted. At this point, I thought it would be rational for other firms to cut their losses and move into other markets, which are essentially still a duopoly. We are engaging in a price war with two different firms with capacity advantage in each respective market and I’m afraid that we are stretching ourselves a bit too thin. I wanted to expand our capacity in Market B much higher despite the differentiated market and plentiful competitors. It’s a gamble that will raise our profit if it goes well. For now, I’m maintaining the price as previous period because there’s an equilibrium over here as well.

I’m envious of the firms who initially ventured into the other two market because they seemed to be doing quite well with few competitors.