HSBC in a bit of trouble.

18 billion dollars worth of trouble. Late last week I received a letter from HSBC advising me that the interest rate on the line of credit they offered me was going to jump up to prime plus 3%. Originally it was supposed to be prime plus 1 for the life of the account. Times have changed.

Reports over the weekend finally confirmed what I had been suspecting. Details of todays financial statement from the worlds largest european bank showed that huge losses have affected its income in the last quarter of 2008 and will probably continue to do so for 2009. They are also planning on holding a capital fund raising by issuing rights warrants at nearly half of fridays closing share price. However, those warrants are said to allow investors the option to convert or purchase twelve regular class shares for every five purchased.

HSBC had for a long time been considered one of the few stable financial institutions requiring no cash bailouts. Yet income has dropped over 60% and dividend payouts are expected to drop in the last quarter of 2009. HSBC is stopping all personal loans and mortgages in the US through their american division which has hit them with the largest portion of their losses. Business in China is also looking to slow down as China issued a statement saying that they are concerned about public unrest. They expect that close to 20 million people may become unemployed. This is a huge chunk of a growing population and will certainly show its affects in all areas of China’s economy.

Warren Buffet admitted on the weekend in a speech of his own mistakes in studying the markets as his own berkshire owned business have suffered far greater business losses than he had expected. He then went on to say that the US economy for the rest of 2009 will be in shambles.

For the above reasons, I still believe the share price of HSBC will continue to fall to at least the capital rights warrants issues price. Less than an hour to go and HSBC common share are down a little over 18%. Overnight in europe the share price dropped 22%. In Hong Kong trading was halted as the official financial statement and business plan was released. Tonight it’s shares will certainly drop in Hong Kong. Tomorrow we might see a small rebound before another leg down towards the $17 level.

Buying Put option strategies are the key for HSBC shares with returns over 150% if not more.