Ana_Idkit

So much hype has surrounded  UBS and after much research, I have come up with the following statements about UBS.

UBS’s performance in the second quarter

On 4 July, UBS announced that its results for the second quarter, which will be released in full detail on 12 August, are likely to be at or slightly below break-even. This result reflects the continued difficult market conditions during the quarter and the resulting write-downs and losses on UBS’s positions related to US real estate and related structured credit positions. Positive contributions from Global Wealth Management & Business Banking and from Global Asset Management were offset by a loss in the Investment Bank.

Reasons why UBS amassed such large exposures to the US residential real estate market

The high level of exposure to this market can on the one hand be traced back to the fact that UBS followed an aggressive growth strategy in its fixed income business within the Investment Bank, in order to catch up with competitors. At the same time, the Investment Bank had access to relatively inexpensive short-term financing, based on UBS Group’s strong credit rating, which made such positions profitable. Finally, the formation of DRCM, our internal hedge fund founded in 2005, resulted in larger overall positions in the US mortgage market than we would otherwise have had.

Measures to further reduce the different exposures

For risk management purposes UBS has already segregated most of its assets related to US residential real estate into a portfolio work-out unit, separating these positions from its other, profitable, businesses.

As announced on 1 April, UBS is in the process of creating a new entity to hold substantial parts of this workout portfolio. The aim is to reduce exposure to this entity in a way that optimizes value for UBS shareholders.

On May 21, UBS announced that it has closed on the sale of approx. USD 15 billion of primarily Subprime and Alt-A US residential mortgage-backed securities to a newly created distressed asset fund that will be managed by BlackRock, a global investment management firm.

Future developments – further writedowns?

The year started with tough business conditions for the financial industry as a whole. We expect this difficult environment to remain. But after the successful measures to strengthen the capital base, we are confident that UBS will remain one of the best capitalized banks in the international financial industry. With a strong capital base, the underlying strength of its core businesses, and the measures we have implemented to isolate its US real estate problem, UBS has created the basis to weather one of the most difficult periods in the history of the industry.

How well is UBS capitalized?

We have taken several substantial measures to strengthen our capital base. In 2007, we decided to issue a stock dividend instead of a cash dividend, to rededicate treasury shares and to issue Mandatory Convertible Notes to two investors in the amount of CHF 13 billion – a move which was subsequently approved by shareholders at the EGM on 27 February 2008.

In June 2008, we have successfully completed the CHF 15.97 billion rights offering. Taking into account the proceeds from the rights issue and the EUR 1 billion Hybrid Tier 1 issue already completed in April, UBS’s capital strength returned to a level which is among the highest in the industry. At the end of the second quarter, UBS expects its Tier 1 capital ratio to be approximately 11.5%, and has no need to raise new equity.

Are your deposits safe?

Your deposits are safe. With UBS’s strong capital base, the underlying strength of our core businesses, and the measures we have implemented to manage our US real estate problem, we are confident that we have created the basis to weather one of the most difficult periods in the history of the industry.

Deutsche, UBS Fight History Forecasting Best S&P 500 Since 1982

By Eric Martin and Michael Tsang

July 7 (Bloomberg) — Deutsche Bank AG, Lehman Brothers Holdings Inc. and UBS AG say the Standard & Poor’s 500 Index will gain the most in 26 years during this year’s second half. That isn’t going to happen, if history is any guide.

The S&P 500 will rise 18 percent by January, according to the consensus projection of 10 U.S. strategists surveyed by Bloomberg. The forecasts are based partly on estimates that profits will jump 50 percent in the fourth quarter after falling for the past year.

Even if that happens, it may not be enough. In 2001, the last time profits fell as much, they then had to climb for three straight quarters before stocks rebounded. Analysts’ earnings estimates for this year still represent a decline from 2006 levels, making the strategists’ optimism harder to justify, investors say.

“If they’re accurate, I’ll give them a big kiss,” said Randy Bateman, who oversees $15 billion as chief investment officer at Huntington Bancshares Inc. in Columbus, Ohio. “I don’t think those are very realistic figures.”

The S&P 500 dropped 1.2 percent last week to 1,262.90, coming within a percentage point of a “bear market,” defined as a 20 percent plummet from its peak in October. Based on the index’s closing price of 1,280 on June 30, the average strategist forecast of 1,515 by year-end calls for the biggest rally of any second half for the S&P 500 since Ronald Reagan was in the White House in 1982.

Unrepentant Bull

Strategists at Deutsche Bank, Lehman Brothers and UBS are the most bullish and expect the benchmark for American equities to climb to a record in the second half. Binky Chadha, Deutsche Bank’s New York-based chief strategist, says the S&P 500 will end the year at 1,650, up 29 percent from June 30.

Ian Scott, Lehman’s global strategist, is predicting an advance of 27 percent to 1,630, while David Bianco at UBS says the index will increase at least 25 percent.

The S&P 500’s rebound “is going to be one of the greatest roars we’ve seen,” Bianco said. “The market has way too many fears baked into the valuation right now. The fear out there is the earnings are about to collapse and interest rates are about to surge on inflationary fears. Neither is going to happen.”

Strategists’ annual forecasts have been off by an average of 14 percentage points since 2000, according to data compiled by Bloomberg. They haven’t projected an annual decline in at least eight years.

`Monkey With Abacus’

At the start of the year, strategists told clients to expect an average 11 percent advance in the S&P 500 in 2008 to 1,634, Bloomberg data show. The measure has dropped 14 percent so far.

“A monkey with an abacus is probably better at the end of the day,” said Peter Sorrentino, a Cincinnati-based senior money manager at Huntington Asset Advisors, which oversees $16.7 billion. “To read the strategists’ input is intriguing and thought-provoking, but at the end of the day, you’d better have your own tools. We’re nowhere near as optimistic as some of the forecasts.”

The U.S. housing slump, the worst since the Great Depression, will drag down economic growth and profits, and limit share gains, Sorrentino said.

The economy grew 0.45 percent last quarter, according to economists surveyed by Bloomberg. Employers cut jobs for a sixth consecutive month in June, the longest string of payroll declines since the last recession, while service industries shrank, signaling the slowdown may deepen.

Alcoa Kickoff

Profits at S&P 500 companies fell for three straight quarters and are estimated to have dropped 11.2 percent in the second quarter, according to data compiled by Bloomberg. Four consecutive periods of declines would be the most since the last recession in 2001.

Alcoa Inc., the world’s third-largest aluminum producer, kicks off the second-quarter earnings season tomorrow. The New York-based company earned 67 cents a share, 17 percent less than a year earlier, according to consensus estimates.

In the third and fourth quarters, analysts expect average profits for S&P 500 companies to increase by 10.5 percent and 49.8 percent. Financial firms — the hardest hit by the collapse of the subprime mortgage market, with more than $400 billion in credit losses and writedowns globally — are forecast to report a gain of more than fivefold in the final three months.

Last quarter, earnings at banks, brokerages and insurance companies probably fell 60.1 percent. Under the analysts’ projections, profits at U.S. companies would increase by 5.6 percent for the full year.

Paying It Forward

“Earnings in a lot of sectors should look good,” said James Swanson, Boston-based chief investment strategist at MFS Investment Management, which oversees $204 billion. He expects the S&P 500 to gain 23 percent to 1,580 by Dec. 31. “Financials should be making money again. There’s certainly a lot of wreckage now, but there are bargains out there.”

The Federal Reserve’s most aggressive interest rate cuts since the 1980s will lift the market as the benefits for businesses and consumers start to be reflected in share prices, Swanson said. The Fed has lowered the benchmark rate by 3.25 percentage points to 2 percent since September.

Shares may still drop even after earnings recover, which is what happened during the last recession. The S&P 500 lost 13 percent during the five quarters of profit declines between 2001 and 2002. In the last three quarters of 2002, when earnings increased again, the index fell a further 23 percent.

“There’s always going to be ebbs and flows in the economy, but we believe that this is a start of a significant bear market,” David Tice, founder of the $1.2 billion Prudent Bear Fund, said on Bloomberg Television. “We are going to pay the price for it with much lower stock prices.”

To contact the reporters on this story: Eric Martin in New York at emartin21@bloomberg.net; Michael Tsang in New York at mtsang1@bloomberg.net.

Before I get into today’s blog, let me say how great it feels to connect with you all again. I am still restricted to limited periods in front of the computer. But, at least, I’ll be able to start writing and trading.

So, to my USA readers, I hope you all had a great July 4 holiday!

One more item – I’ll be putting up a site with details of the free webinar for Nature of Trend readers – the webinar will be held end of August. The idea is a simple one. Quite a few buyers of the book readers have asked for guidance. Since the NOT material is applicable to both day-trading and position trading, I felt a free 3-hour live trading session would give the readers some idea of how I approach the markets. With that information under their belts, readers will be able to develop their own style. For readers who are unable to attend, I’ll have a Camtasia file made for later viewing.

I’ll post the site as soon as details for the webinar are finalised.

Now let’s turn to today’s topic.

While lying in my hospital bed, I had occasion to reflect on why some STC students (mentor students) failed to make the grade while others succeeded. There are many reasons but if I had to choose one, I’d say that those that failed, failed to appreciate full consequences of the Expectancy Return formula:

(Avg$Win x WinRate) – (Avg$Loss – Loss Rate) >0

I could write a book on the ramifications here; but here are a few main points:

• Our trading approach must have a positive mathematical expectancy. Unless you have a proven methodology, consistent execution (winning psychology) and appropriate position sizing (effective money management) will mean only that we’ll die a death of a thousand cuts.
• We know what our ideal trades look like. Each of us have setups that work better than others. We need to know which ones work better for us than others. Knowing this, we can increase our position size on the ‘better setups’. In addition if we keep track of our ‘average result per trade’ and the ‘average result per contract per trade’, we’ll know if our increased position sizing is working: our ‘result per trade’ (on a one contract basis) ought to be greater than the ‘result per contract per trade’.
• Since the formula is about averages, we are looking at a large sample size rather than a small sample or a sample based on trade-by-trade basis. Viewed in this light, we realize that there are only two types of trades: “profitable trades” and “lesson trades”. The failed STC students viewed each trade as a ‘do-or-die’ situation rather than just one ‘in the next 100,000′. By taking this view, they emotionally over-invested and made it almost inevitable that they would breach their trading rules on the next trades.
• To take advantage of the formula, we need certain emotional qualities:

1. ‘Honesty’: the value of never consciously faking reality. If there is one trait that distinguishes the successful STC graduate, it has been this one. Successful STCers were brutally honest with themselves. Failed STCers tended to provide excuses and rationalizations for their failures e.g. in a down-trending equity curve. I had a student who failed to execute his written trading plan in the simplest way: he’d usually enter intra-day when his plan called for end of day entry. And, since his results showed that EOD entry for him would be profitable, we both knew that EOD was the better path for him. Yet rather than take action to ensure he’d enter on an EOD basis, he’d make excuses for his breach of discipline.
2. Responsibility: Successful STCers took full responsibility of their successes and failures. With successes, their question was: how can I repeat this? With failures, their question was: what can I learn from this?
3. Tenacious: Successful STCers did whatever was neccessary to achieve their goals. This included, first learning the material, then adapting it to suit their needs. Failed STCers, tended to resist the material whenever that led outside their comfort zones.
4. Disciplined: Finally successful STCers were disciplined enough to write out their trading rules and executed those rules consistently. They were disciplined enough to keep their psyche and equity journals so that they could learn from their trades. And they were disciplined enough to celebrate their successes and take time from the markets to recharge.

I believe that traders wishing to do well could learn a great deal from STC successes. It would be interesting to hear your thoughts.