Monday, February 28, 2011

영어 Through Entertainment: The Godfather Part III "They pull me back in..."

The Godfather Part III is a Terrible Movie
Generally speaking, The Godfather Part III is an awful movie.  It was a sad ending to one of the most storied cinema franchises ever.  Very rarely, if ever, does a sequel surpass an original.  Well, that occurred as The Godfather Part II won the Oscar award for Best Picture.

Nevertheless, This Single Line is Memorable
The main character of The Godfather trilogy is Michael Corleone.  As he grew older, he attempted to legitimize himself, and his ill-gotten gains.  Despite his effort to get out of illegitimate business, he failed.  Forces around him made quitting his illegal activities impossible.

"They pull me back in"Has Another Meaning
Of course, you can easily understand the language.  Corleone believed that he was going to become legitimate, but was unable.  The hidden meaning, however, is more subtle.  It has become to be an ironic statement, which implies that he never really meant to leave in the first place.  Furthermore, he is blaming some other force (the "they") for the his failure to become legitimate.  It is of course, not true. 

(o)  I wanted to leave the nightclub, but they pulled me back in.
(o)  I wanted to stop watching reruns of Boys Over Flowers, but they pulled me back in.

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Sunday, February 27, 2011

영어 Through Entertainment #7: The Jedi Mind Trick

A Long Time Ago, In a Galaxy Far, Far Away...
Star Wars (1977) is the most famous science fiction movie of all time. The brainchild of George Lucas, Star Wars still, incredibly, lives via cartoons, books, and movies. The original Star Wars is actually called Star Wars IV: A New Hope. While other movies have grossed more at the box office, George Lucas created an entire industry which began with Star Wars, including the creation of companies vital to film-making.

Star Wars Created the Phrase "Jedi mind trick"
There are many famous scenes in Star Wars, and one of them is here, which is the first time that we see evidence of the "Jedi mind trick."

What Does "Jedi mind trick" mean?
Obi-wan Kenobi, a Jedi knight, has used brain power to make the stormtroopers (the armed guards) believe what he (Obi-wan) wants them to believe. Today, the "Jedi mind trick" is another way of saying that you have fooled someone into believing what you want that person to believe. Today, you can still hear the phrase "Jedi mind trick" in movies or on TV.

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Saturday, February 26, 2011

Ouch! Deutsche Bank Sanctioned by the Korea Exchange (KRX)

Deutsche Bank AG Fined by the Korea Exchange (KRX)
The Korea Exchange has levied a record KRW 1 Billion fine against Deutsche Bank AG, one of the world's leading global investment banks.  The reason?  Program trading during the last minutes of November 11, 2010, when the KOSPI sank by over 2.5% within the last 10 minutes of trading.  Why is that date important?  It is important because certain financial contracts (futures, options, and options on futures) all expired on that date.  The alleged misconduct was due to the fact that Deutsche Bank failed to report its activity within the allotted time near the market close.  It is alleged that Deustche Bank's proprietary trading group sold a great amount of equity which triggered a rapid, unexplained decline in the overall market, and Deutsche Bank profited for its own account during that time.  There are multiple lessons to be gleaned from the event, and the punishment.

Program Trading Exists in Every Large Equity Market
Large banks, hedge funds, and other money managers actively use program trading, which are computer-generated actions that result from a simultaneous scan of the entire market at once.  Every firm's program trading algorithm, or set of trading rules, uses a slightly different set of factors in making buy or sell decisions.  Some have suggested that program trading gives an unfair advantage to the firms that deploy such tactics.  Guess what?  That happens in every market, and in every business.  The most profitable grocery store is the one that has the best prices for the supply of goods that it sells.  It isn't program trading, per se, that is the culprit here.  However, as readers will see below, that is, in fact, what is being indicted.

Late Reporting of the Activity is the Cause of the Fine.  This Matters?
Now this is pretty flimsy.  It is said that the KRX has fined Deustche Bank for filing its disclosure of activity one minute late.  This leaves more questions than answers.  Does this mean that market participants are watching the disclosures themselves for information regarding whether or not there are these automated programs at work?  In other words, lets say you are an investor.  Are you looking to the KRX for the disclosures in order to get an advantage in the market?  Let's say now that the market begins to move in one direction or the other.  You ask the KRX for the information, and it says that there is no report of a large program trading execution in the market.  You as the investor have three choices.  Buy, sell, or hold.  But, those are the same three choices the investor had 10 minutes ago.   By the way, does anyone believe that Deustche Bank was the only active, competent participant in the market at that time?  There is zero chance that the answer is yes.  There is fierce competition all the time among market participants.  In other words, there are equally smart and qualified people at other companies, in Korea, that would have had the ability to buy what Deustche Bank was trying to sell.  Did Deutsche Bank break a rule by being one minute late in its report?  That is a matter of fact, so you would have to presume the answer is yes.  Did the one minute late report cause the market decline with no other buyers?  Not unless everyone in the Korean equity market only looks for program trading execution to get its clues, i.e. the short answer is no, it is highly improbable.

This Boils Down to Bad Rules and Illiquid Markets
When there are many buyers and sellers, and you can buy or sell securities rapidly in large amounts, it is called a liquid market.  It is most likely that the KRX is using the 1 minute violation to fine Deustche Bank for taking advantage of an illiquid market.  That is what they are supposed to do.  If you were a stockholder of Deutsche Bank, then you would have been happy to know that Deutsche Bank was smart and fast enough to do this.  You don't hear about Hyundai-Kia shareholders complaining about the fact that Hyundai has gained market share as Toyota is suffering from quality problems, do you?  Deustche Bank should have followed the rule of giving the information one minute earlier.  There is no doubt about that.  Is that what is being punished here?  No.  This is another rule on markets which is being used against a large bank when governmental officials discover a weakness in the market structure.  Again, that activity happens all the time in every financial market and every other type of market.  It is the fact that Korean regulators deemed it inappropriate activity, and found the loophole by which it justified the punishment.  One minute late.

The Punishment is Onerous, the Deterrent Hurts Who?
It is not the USD $1 million fine that matters in the least.  It IS the six months' time when Deustche Bank must cease proprietary activities in Korea.  Now that is a large problem.  That will clearly cost Deutsche Bank.  Their financial reports do not itemize the source of revenues, but the lost revenue will be many, many times the paltry $1MM fine.  The question that remains is whether or not there is a deterrent?  Well, certainly no firm will report one minute late to the KRX.  However, the real question is whether or not advanced financial firms will want to continue to pursue their activities which support the advancement of the financial industry in Korea.  It is suspiciously convenient that the KRX has used the "one minute late" reasoning to punish Deutsche Bank.  If there are position sizing limits that have been violated, then that is another matter.  However, that has not become public record as yet.  "Naked" or unhedged positions does not seem to part of KRX' charges.  Let's put this another way:  if the market went up by 2.5% during those 10 minutes, would there be this type of charge?
The Seoul Gyopo Guide has been created to pursue the central theme that as Korea matures, the rules and the effects will be different, and Korea must adjust to a larger world with competent, global competition.  In this case, the KRX has proven that it can hand down harsh punishment.  The question is whether or not it can prove that it is a justified punishment.  "The market went down" isn't a defensible reason, so this story is nowhere near being completed.  It will be very interesting to see how the facts get told and how the fines get justified.

Friday, February 25, 2011

Blame Foreign Speculators? They HELP Korea, Not Hurt It

Koreans Love to Blame Foreign Speculators
You can easily find that Koreans based in Korea often blame foreign speculators for the volatility of Korean markets and assets in general. In the Korean press, you will be able to find not-so-subtle articles which suggest that foreigners are responsible wild gyrations in asset prices.  Sometimes, the blame rises to a fever pitch, and political decisions get made which are totally unjustified when you apply internationally accepted norms.  Not norms only accepted by the U.S., but by the global community as well.  As Korea matures into a first-world country, these political decisions are not favorably received by the global community.  The Seoul Gyopo Guide has pointed out, on multiple occasions, that the KEB debacle was completely unjustified, and motivated by political whim only.  The reality is that over the past few years, Korea has benefited greatly from foreign speculators' movement of money around the world.

Korea Has Benefited a Great Deal Because the Yen is Strong
For those that have read the Seoul Gyopo Guide in the past, this headline is no surprise.  Korea has feasted on one simple fact:  the Japanese Yen is very strong, for a number of reasons, and that has made Japanese products too expensive in the international marketplace, and in many cases, has severely hurt Japanese company profitability.  Toyota, Sony, you name it, they have been hurt by Japanese Yen strength.  Who has benefited?  Hyundai-Kia and Samsung Electronics (and others).  We can debate this or that feature but the fact is that these products by Japanese and Korean companies are very competitive with each other.  The reason that has occurred is because Korean companies have used their gains in the international marketplace to improve the quality of products produced.  Those gains were the result of the fact that Korea's products were cheaper compared to Japanese products due to the JPY/KRW exchange rate.  Twenty years ago, no one would compare a Sonata with an Accord.  Today, that is very much the case.  Korea has the strong Yen, in no small part, to thank for that.

Why is the Yen So Strong If Its Economy is in Decline?
There are a large number of reasons for this and too numerous to completely analyze here.  However, here are a few.  First, Japan has an economy where its debt, though very large, is largely owned by the Japanese.  As a result, you don't have foreign investors selling Yen-denominated securities every time it is more clear that the Japanese debt burden is large.  The ratings agencies have downgraded Japan recently.  The Japanese Yen didn't move appreciably.  Second, the stability of the debt, coupled with the stagnant Japanese economy, has led to the "Yen carry trade."  It has allowed foreigners to convert into Yen, and then pay back the Japanese interest rate, which has remained close to zero because of the stagnant Japanese economy. So, when there is increased risk around the world, investors convert their currency into Yen.  That is exactly what has occurred over the past week, and over much of the past few years, as governments around the world have borrowed money from foreign investors.  Where has that not occurred?  Japan.  The result, the Yen, which should otherwise be weak, has remained strong relative to other global currencies, and the Korean Won.

The Korean Won / Japanese Yen FX Rate Hasn't Moved
In fact, the rate as of this writing is approximately 13.6.  Before the financial crisis hit, that rate was around 8.0.  Amazingly, the Korean Won has actually weakened compared to the Japanese Yen since the beginning of 2010.  That has been to Korea's corporate benefit.  The reason that there are so many more Japanese and Chinese tourists around Myung-Dong?  Korea is cheap compared to their own markets.
Now, part of this is explained by the Bank of Korea's intentional policy.  The BOK has a difficult task, because a weak Korean Won has caused increased inflation.  For example a Korean Won can buy fewer imports because the import is priced in its own currency.  It isn't all good news that the Korean Won has not strengthened greatly against foreign currencies. Nevertheless, the idea that foreign speculators are to blame is a misguided notion.

The Lost Seoul is qualified to write in-depth posts around this topic but is more interested in the central theme: Korea will have to deal with the effects of joining the elite nations of the world.  Critics of the government and policy makers will need to take this into account before throwing out inaccurate statements and criticisms  which no longer apply.  The rules of competing on a global playing field, with and against competent, global competitors are not easy to manage, nor should they be.  Old-fashioned thoughts and criticisms applied when Korean companies did not make world-class products.  Old-fashioned criticism against the government don't work because while Korean products are world-class, the restraints of small population, small geographic size, and lack of natural resources are unique to Korea when compared to Germany, Japan, and the U.S.  As a result, policy must take this into account, and critics must as well.
These are "high-quality" problems.  A "high-quality" problem is one that occurs because Korea has successfully used the past few decades to make unprecedented progress on the global economic stage.  Other "emerging market" countries have not had to deal with the same restraints that Korea has faced and overcome.  Brazil?  Enormous amounts of natural resources.  China?  1.4 Billion people.  India?  1.1 Billion people.  Foreign speculators are not the root of the problem:  the issue is that Korea faces unique challenges as it stares down Toyota, Siemens, and Ford on the global stage.  Blaming foreign investors as wild speculators have actually created Yen appreciation, which has, and continues, to benefit Korea.