Friday, October 31, 2008

Pension liability at Investment Banks soar

Financial giants getting injections of federal cash owed their executives more than $40 billion for past years' pay and pensions as of the end of 2007, a Wall Street Journal analysis shows.

The government is seeking to rein in executive pay at banks getting federal money, and a leading congressman and a state official have demanded that some of them make clear how much they intend to pay in bonuses this year.

But overlooked in these efforts is the total size of debts that financial firms receiving taxpayer assistance previously incurred to their executives, which at some firms exceed what they owe in pensions to their entire work forces.

The sums are mostly for special executive pensions and deferred compensation, including bonuses, for prior years. Because the liabilities include stock, they are subject to market fluctuation. Given the stock-market decline of this year, some may have fallen substantially.

Some examples: $11.8 billion at Goldman Sachs Group Inc., $8.5 billion at J.P. Morgan Chase & Co., and $10 billion to $12 billion at Morgan Stanley.

Thursday, October 30, 2008

Wall Street Compensation

Since the start of 2002, Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman Brothers Holdings Inc. and Bear Stearns Cos. have paid a total of $312 billion in compensation and benefits. Bonuses generally account for about 60% of total Wall Street compensation, meaning that the five firms paid out an estimated $187 billion in bonuses.

The tried-and-true compensation model has come under fire since the Treasury Department announced plans to inject capital into financial institutions. Goldman, Morgan Stanley and Merrill are among the initial nine companies getting a combined $125 billion in government capital, fueling worries that taxpayer funds will be used to essentially subsidize Wall Street bonuses.

In 2002, Morgan Stanley started at 55, it's now at 16. $40 billion of shareholder wealth gone. Merrill Lynch started at 52, it's now at 17, $50 billion of shareholder wealth gone. Bear Stearns lost bondholders and shareholders at least another $50 billion! We don't even know yet how much Lehman Brothers cost shareholders and bondholders, but the safest bet is that it cost them more than the previous three. Now we are up to $300 billion. And then comes "Government Sachs" whose story isn't yet written. They just were more skillful at pretending they had better risk control than the others. Their stock price is the same as it was in 2002.

But in 2002, Goldman Sachs didn't have $60 billion of Level 3 assets, of dubious distinction. What's that haircut on these or the haircut of their derivatives? So these firms, lost every penny that they took in compensation, but the money they took, they took from the shareholders or the bondholders of the companies. Now they want to take yours!

These firms are now worried about compensation? Where's the clawback for the previous years? They think they need to pay their "talent" or else they will find work elsewhere? Where? At a hedge fund that just blew up? Let them go. They don't need to be paid to stay.

These firms have been stealing money for the past six years. Now they think nothing of stealing taxpayer money for their bonus pool!

Because they think the $312 billion wasn't enough!

It reminds me of two wise guys out on the street. They went to the guy in the hardware store, and told the owner they were getting 10% juice on his money. He then gave them 10 grand. They came back the next week, and said, they were now getting 15% juice. He then gave them 20 grand. The next week, they said that the action was so hot, that they were now getting 30% juice, so he gave them another 20 grand. The next week, they told him of all the money he was making, and the hardware store owner said he didn't want to lay out any more money, but he just wanted to collect his juice. The wise guys said that they would come back with his pay, but first one of them starting looking around for paint. The other wise guy looked at the other and said, "What are you getting paint for?" And he whispered back to him, with colorful expletives, that he was going to go and paint his room, because he wasn't coming back here anymore. They walked out with the two cans of paint, yelling at the front door, that "they'll get him for the paint when they come back."

You steal on the street, and you're a criminal. You steal on Wall Street, and they write you up in the Wall Street Journal.

But Wall Street wraps up their theft with the help of prospectuses, structured products, derivatives and lawyers with help from their friends in politics and the press to spin their story.

But they are no different than the guys walking out of the hardware store with two cans of paint.

$90 billion in derivatives set to blow up in Japan

Power Reverse Dual Currency Notes (PRDC), dreamed up by Investment Banks to give the gray haired saver in Japan a little higher yield, have now been found to be a derivative of toxic sewage, tied into the carry trade.

And the losses could hit $90 billion.

Japan's big three banks have portfolio losses of $100 billion on their stock holdings; now we'll have something else to throw in the mix.

And who dreamed up these esoteric PRDC's?

Besides "Japan's Big 3" we have Citigroup, JP Morgan and Goldman Sachs, who got $25 billion, $25 billion and $10 billion respectively of taxpayer bailout money, and now want the taxpayer to subsidize their year end bonuses!

Read the whole story here without my editorial bias!

The "Bonus" letters from Waxman

I don't hear any investment banks telling us now that we should buy the material and commodity stocks, and now that it is apparent they are at multi-year bottoms, we get sell recommendations and commodity price projections that assume that all this liquidity being sloshed around by the Fed (now to Brazil, Mexico, Korea and Singapore!) won't have any effect on pricing or on economic growth.

But according to Waxman, $108 billion has been set aside on Wall Street for bonuses! Here's Waxman's letter to Goldman Sachs:

Earlier this month, the Treasury Department announced plans to invest $125 billion of taxpayer funds in nine major banks, including yours, as an emergency measure to rebuild depleted capital. According to recent public filings, these nine banks have spent or reserved $108 billion for employee compensation and bonuses in the first nine months of 2008, nearly the same amount as last year.

Some experts have suggested that a significant percentage of this compensation could come in year-end bonuses and that the size of the bonuses will be significantly enhanced as a result of the infusion of taxpayer funds. According to one analyst, "Had it not been for the government's help in refinancing their debt they may not have had the cash to pay bonuses..

If these letters get some traction, it would do a lot for helping confidence on Wall Street.

A couple of weeks back, when the market was down around 8,000 Buffett said he was buying stocks individually. That letter was looked at as just the musings of a senile old man.

Maybe it was the hedge funds selling that had the fit of dementia!

Wednesday, October 29, 2008

$100 billion in pension costs need to be paid

US companies will need to inject more than $100bn into their pension funds to cover market losses, putting them in a cash squeeze at a time when it is difficult to raise money.

The cash payment, estimated by several pension industry executives, would be spread over this financial year and next year.

Companies’ pension fund losses – running at an estimated 20 per cent in the year to date – also are expected to alter earnings this year, partly because of accounting changes.

The 700 largest corporate plans were more than 100 per cent funded at the end of last year, but as of last week that had fallen to about 83 per cent, according to estimates by Mercer, a pension consultant.

John Erhardt, a principal at Milliman, a consulting firm, said: “To bring company funds back to 100 per cent funding, companies would need to put in about $50bn this year and that again next year, for the top 100 funds. You could add another 30 per cent to 40 per cent to that for the rest of the funds.”

“Earnings will be impacted significantly. The 2008 year-end balance sheet will reflect that.”

Mr Erhardt said there were about $300bn in fund losses to the end of this month.

After the introduction of the Pension Protection Act this year, that would go “straight on to the company balance sheet”.

A report by Credit Suisse estimated that at the end of September there were 136 companies that would need to lift contributions to their pension plans by half or more.

It said 76 companies had seen a drop in funded levels for their schemes that was greater than 5 per cent of their corporate book value.

These included seven companies where the drop was more than 25 per cent of book value: Unisys, Qwest, Embarq, Ford, Western Union, Dean Foods and Pactiv Corp.

David Zion, who wrote the report, estimated that apart from the cash payout, there were 65 companies whose earnings could be cut by 10 per cent because of an increase in pension costs.

The change to earnings is separate from the cash infusion necessary to shore up the funds.

The American Benefits Council, which represents corporate pension plans, is lobbying for the federal government to suspend some of the PPA rules, which require mandatory contributions if funds fall below a certain level.

Nobody wants mark to market accounting and now no one wants actuarially accurate pensions!

Bernanke needs to "tweak" again

With much fanfare, a few weeks back Bernanke announced that the Fed would pay interest on reserves. It first was at a rate 75 basis under the Fed funds; then it was 37.5 basis under it.

It, like most of Bernanke's tweaks failed. In tonight's WSJ we have this:

Fed officials thought that managing the rate would become easier after Congress earlier this month granted the central bank new authority to pay interest on excess reserves. In theory, that should create a floor on the rate banks charge for overnight loans.

The move so far hasn't provided the floor expected, something Fed officials are studying. They have already altered the interest rate they pay on these reserves, bringing it closer to the fed funds rate, and might need to tweak their rules again.

Bernanke assumed that his policies and the paying of interest on reserves would set a floor on rates, and that he and his merry men would then worry about the economy recovering, when it wasn't even off the critical list.

Today he recognized the critical patient hasn't even stabilized.

That's why a mischaracterization of a statement by GE could take 400 points off the Dow in 10 minutes.

Despite a 50 basis point cut in the Fed funds rate to 1%.

Easing and bailouts everywhere

China cuts rates to 6.66%. It's third cut in six weeks.

The IMF bails out Hungary, lending them $25 billion, which is 10X their quota.

Hypo real estate asks for $15 billion euros to bail them out.

Porsche will sell 5% of it's VW stake to book billions and some of the dying hedge funds who are short Volkswagen common will buy the stock to settle their obligations. Porsche wins, the shorts lose. And SEC's Chris Cox, should learn a lesson from the German regulators who know how to orchestrate a squeeze, who loathe these hedge fund shorts ("locusts")! Gangsters understand gangsters!

GM and Cerebus look to buy Chrysler with help from $10 billion of Government bailout money, with the Department of Energy backstopping the Fed's with $5 billion in their side pocket.

And today, the Fed cuts rates again.

Billions for banks, but nothing to those losing their homes!

Tuesday, October 28, 2008

The Volkswagen rally!

Volkswagen has been mowing down hedge fund managers who illegally shorted this number, and also those charlatans who pretended that they actually had a locate. Porsche, which controls 74% of Volkswagen has a market cap under $10 billion, while Volkswagen's market cap exceeded Exxon's today, approaching $350 billion!

The stock doubled yesterday, and almost doubled again today. Morgan Stanley and Goldman Sachs were attacked by the shorts, on the story they were short Volkswagen, and the short crowd attacked them, until the Plunge Protection Team stepped in, and brought these stocks up in the face of those leaning on them. They had help after they both came out saying their exposure to Volkswagen wasn't material.

But when Volkswagen can move such huge moves, it means that some of these so called smart money shorts are now bust. With the government all in, shorting is like fighting baseball and apple pie, even if you have to wait out the rain.

When leverage becomes reduced, and positions turn against you, you get bought in, when the shorting rules are enforced. And it looks like Volkswagen's stock price, may have bought in some shorts who were using the same technique of naked and nefarious shorting to break companies. Now, instead, a stock broke them! And it was a VW bus that mowed them down!

Poetic Wall Street justice!

Monday, October 27, 2008

What does $100 billion in Zimbabwe get you?

Nobody prints like Zimbabwe

Want 3 eggs? It will cost you one hundred billion dollars!

Sellers of paper gold, buyers of real gold

Gold and silver coins are selling at one of the widest premium to spot, and now, even in Dubai, there seems to be a shortage of gold. Only on Wall Street is there such a discount. Maybe that's what Wall Street wants the public to think:

Dubai: A massive rush at jewellery shops has led to a shortage of gold at some outlets, prompting some shopkeepers to overcharge customers, Gulf News has learnt.

Jewellers are seeing a huge rush of buyers as gold prices are currently at a two-year low.

Shopkeepers said the rush, a combined result of the Hindu festival of Diwali and lower
prices. has resulted in a shortage of gold bars. But they denied any hoarding by outlets.

How good is Goldman if they wanted to merge with Citigroup?

Anyone with a pulse knows that Citigroup is "insolvent" with it's balance sheet, but people just assume that it is too big to fail, so we put up with their nonsense.

Then why would Goldman Sachs, make a call to Citigroup for a merger?

Is their more toxicity on Goldman's balance sheet?

Despite getting Buffett's money, and money from Treasury, Goldman still trades heavy. Why bother owning it?

Lloyd Blankfein, Goldman Sachs’ chief executive, called Vikram Pandit, his Citigroup counterpart, last month to discuss a merger, in a dramatic example of the secret manoeuvring that preceded the government bail-out of the financial sector.

The call, which was made at the tentative suggestion of the regulatory authorities or at least with their blessing, was made shortly after Goldman had won surprise approval to convert itself from a securities firm into a commercial bank on September 21, according to several people familiar with the events.

Deleveraging and liquidation

Everyday we hear the same thing, and every morning stocks look down. We have companies that wasted money trying to prop up their stocks, and we had countries who wasted money trying to prop up their currencies. Now these Central bankers around the world who warn us that they plan on intervening, are like George W. Bush saying he's looking to invade another country.

Stocks and countries are blowing up everywhere because they are insolvent. Asia stocks got crushed again. Japan was down over 6% and is now back to 1982 levels! Hong Kong was down over 12%, and Europe is hit for 4%, and China, which promised a new stimulus plan is clocked for 5%.

But the lurking problem is this:

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Today the IMF announced that they will lend Ukraine $16.5 billion, and announced a plan to lend money to Hungary. Last week they lent Iceland $2.1 billion.

The Ukrainian Prime Minister may be pretty, but their finances aren't. Countries going sub-prime? How far are these tentacles?

Do you think they could be longer than the sub-prime tentacles?

And that's why Asia and European stocks keep getting crushed.

Because they know how entangled those tentacles are!

Sunday, October 26, 2008

Norma Kamali hits Walmart

The designer's store at 11 West 56th Street has just received a shipment of samples from the collection so shoppers can stop in and order what they like to be Fedexed to their apartment. The line, filled with staples like suits, tees, skirts, and dresses, is priced from $10 to $20 per piece (salesperson: "You can buy a whole pinstriped suit for $15") and comes in sizes small, medium and large. The clothing will eventually be available online, but for now you have to go in to the store to browse. The collection's in the window now, with a $20 black sweetheart black dress and $10 black leggings flanking a high-end $2,500 red satin dress.

Frugality hits Manhattan, and high fashion hits T-shirts at Walmart.

The crushing of the euro lies at Trichet's feet

And now, he is powerless to stop it. Trichet, in his smugness, thought he would show the world that he was the only sensible and strong Central Banker with his refusal to cut rates. Now rates in Europe must come down dramatically. And Trichet will soon be a footnote on Central Bankers stubborness and incompetency.

Instead of reducing rates when they were needed, the ECB actually raised rates. Trichet ignored the screams of the market. Those that bought into his stupidity and wanted their petrol dollars in euros are now burned twice.

Look what Trichet had to say October 2 press conference, when he held rates steady, but before the ECB had too cut rates on with coordinated Cental bank easing on the 8th.

Now European banks will soon have huge losses on their books, on their loans to developing countries and emerging markets. Their exposure is 5x the US or Japan's.

And Japan and the US, the countries with the lowest interest rates have the strongest currency.

Policymakers worldwide belatedly now recognize that the greatest risk is deflation. 5 year TIPS (Treasury Inflation Protected Securities) indicate that we will have negative inflation.

Trichet said the market was over-estimating risks. The biggest risk, is that he has over-estimated his judgement!

The next "sub-prime" debacle-The ex Soviet Bloc

The financial crisis spreading like wildfire across the former Soviet bloc threatens to set off a second and more dangerous banking crisis in Western Europe, tipping the whole Continent into a fully-fledged economic slump.

Currency pegs are being tested to destruction on the fringes of Europe’s monetary union in a traumatic upheaval that recalls the collapse of the Exchange Rate Mechanism in 1992.

“This is the biggest currency crisis the world has ever seen,” said Neil Mellor, a strategist at Bank of New York Mellon.

Experts fear the mayhem may soon trigger a chain reaction within the eurozone itself. The risk is a surge in capital flight from Austria – the country, as it happens, that set off the global banking collapse of May 1931 when Credit-Anstalt went down – and from a string of Club Med countries that rely on foreign funding to cover huge current account deficits.

The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.

They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles...

Stephen Jen, currency chief at Morgan Stanley, says the emerging market crash is a vastly underestimated risk. It threatens to become “the second epicentre of the global financial crisis”, this time unfolding in Europe rather than America.

Austria’s bank exposure to emerging markets is equal to 85pc of GDP – with a heavy concentration in Hungary, Ukraine, and Serbia – all now queuing up (with Belarus) for rescue packages from the International Monetary Fund.

Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for the UK, and 23pc for Spain. The US figure is just 4pc. America is the staid old lady in this drama.

Amazingly, Spanish banks alone have lent $316bn to Latin America, almost twice the lending by all US banks combined ($172bn) to what was once the US backyard. Hence the growing doubts about the health of Spain’s financial system – already under stress from its own property crash – as Argentina spirals towards another default, and Brazil’s currency, bonds and stocks all go into freefall.

Broadly speaking, the US and Japan sat out the emerging market credit boom. The lending spree has been a European play – often using dollar balance sheets, adding another ugly twist as global “deleveraging” causes the dollar to rocket. Nowhere has this been more extreme than in the ex-Soviet bloc.

The region has borrowed $1.6 trillion in dollars, euros, and Swiss francs. A few dare-devil homeowners in Hungary and Latvia took out mortgages in Japanese yen. They have just suffered a 40pc rise in their debt since July. Nobody warned them what happens when the Japanese carry trade goes into brutal reverse, as it does when the cycle turns.

Saturday, October 25, 2008

T. Boone Pickens stadium now Bust

Remember T. Boone Pickens $200 million donation to OSU? Lewis Field, "The House that Boone Built?" He left the donation in the hedge fund, borrowed money on it, and bet on higher oil prices. That bet went bust, and so now is the donation.

OSU borrowed money on the hedge fund asset, and now they are on the hook for $300 million that went broke with Boone.

Here's the story, on this college football afternoon!

Tableau of losses

Naked shorting in treasuries is now systemic

The credit crisis is causing a growing number of delivery failures with Treasury securities.

The latest data from the Federal Reserve Bank of New York showed that cumulative failures hit a record $2.29 trillion as of Oct. 1. The federal settlement period is T+1 (trade date plus one day).
(It's now up to $2.5 trillion )

The outstanding U.S. public debt is $10.3 trillion.

"Current [fail] levels are at historic levels," said Rob Toomey, managing director of the Securities Industry and Financial Markets Association's funding and government and agency securities divisions. "There's been significant flight to quality" with the market turmoil, he said.

With the strong demand for Treasury securities, "some of the entities that bought Treasuries are not making them available in the [repurchase] market, which is the traditional way to get them," Mr. Toomey said.

Unlike some past bouts with high failure rates that involved particular bond issues, the current high fails involve all types of maturities, he said.

This month, New York- and Washington-based SIFMA came out with a set of best practices to reduce failed deliveries.

This year, the New York Fed revised its own Treasury market trading guidelines. Its guidelines, originally released last year, warned that short-sellers "should make deliveries in good faith."


Chronic failures can increase illiquidity problems in the market and expose market participants to losses in the event of counterparty insolvency, according to the New York Fed. "There is a question about there being some impact on liquidity if [delivery failures] last for a long period," Mr. Toomey said.

Many retail investors also own Treasury securities, either directly or indirectly. The Treasury market is also an important fixed-income benchmark, so any liquidity problems can affect all participants.

In extreme cases, chronic fails could cause participants to limit their trading in secondary markets, the New York Fed said.

"Who wants to buy what they're not going to get?" said Susanne Trimbath, a market researcher with STP Advisory Services LLC of Santa Monica, Calif. In a September research paper, she estimated that based on failure rates in 2007 and 2008, the cost to investors from failed deliveries is about $7 billion annually.

The cost arises because sellers don't have access to their money. In addition, the federal government loses $42 million a year in lost revenue, and the states miss out on an additional $270 million in revenue due to excessive claims of tax-exempt income on state-tax-free Treasury securities, Ms. Trimbath said.

She and researchers at the New York Fed said that some delivery failures are intentional.

As with naked shorting of stocks, naked shorting of Treasuries "allows you to avoid the borrowing costs," Ms. Trimbath said.

"There can be circumstances in a low-rate environment where it's cheaper to fail" than deliver, Mr. Toomey said. Such an environment also reduces incentives to act as a lender of securities, he said.

A 2005 study by the New York Fed confirmed that episodes of persistent settlement fails are often related to market participants' lack of incentive to avoid failing.

"We've got to get the [Securities and Exchange Commission], the Fed and SIFMA in there to force" Treasury traders to deliver securities, Ms. Trimbath said.

The Department of the Treasury has a buy-in rule for the cash markets, but the repurchase markets rely on contracts, Mr. Toomey said. Currently there are no penalties for failures, and regulators to date have not required disclosure whether the dealer or the client fails to deliver.

By industry convention, fails are generally allowed to roll over until they are eventually closed out, Ms. Trimbath said.


She said that scrutiny by the SEC and the Fed, and widespread investigations into short-selling practices, are driving the industry to rein in questionable practices with Treasuries.
Mr. Toomey said that one of SIFMA's best-practices suggestions is to require that extra margin be provided by the party that is underwater due to a failed delivery.

SIFMA also said that it is establishing a Treasury fails monitoring committee, with representatives from the Fed and Treasury.

The committee will alert the market "when marketwide mitigation, remediation and the attention of management is warranted" because of a high level of fails, SIFMA said in a statement.

The U.S. Treasury is now asking the dealers how they can prevent these cronic fails:

The Treasury also asked the primary dealers what can be done to prevent ``fails,'' when Treasury market participants fail to deliver securities.

``What steps can be taken by the private sector to ensure efficient market function to prevent episodes of chronic fails?'' the Treasury asked. ``For example, could amendments to the master repurchase agreement and the establishment of a standard cash trading agreement provide for greater economic incentives that would help clear fails before they became chronic.''

How about not selling something you don't own? Maybe the FED will announce some new alphabet soup with their once proposed SLLR facility! (Security Lender of Last Resort)

Friday, October 24, 2008

AIG needs more money

AIG is becoming one giant "black-hole." Now $123 billion is not enough.

And Freddie Mac is now looking for $1.2 billion that disappeared from Lehman, that they lent to them the previous month. But they are not alone:

Others who have asked for similar investigations include: Bank of America Corp., Well Fargo Bank NA, Federal Home Loan Bank of Pittsburgh and Fir Tree Value Master Fund LP.

When countries, worldwide are on the brink of default, this may look like just a blip on a screen. But soon, everyone will be owning dollars, and then this country, and it's financial system will get another look.

And we have only seen the tip of the iceberg of these shenanigans.

Russia to default next?

With futures locked limit down, everyone is still looking for the next hedge fund scapegoat who is selling. Just look to Russia. Their stock market has been closed, and oil prices are heading downward, despite OPEC announcing production cuts. When money is this scarce, it just means there will be more cheating on production. And that means oil, will be sold under spot prices in their desperate moves.

Japan's stock market is now under 1982 levels. Asia is cracking everywhere. But today, it is Russia.

Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

The cost of insuring Russian bonds against bankruptcy rocketed to extreme levels yesterday. Spreads on credit default swaps (CDS) reached 1,123, higher than Iceland's debt before it sought a rescue from the International Monetary Fund.

Moves by Hungary, Ukraine and Belarus to seek emergency loans from the IMF have now set off a dangerous chain reaction across Eastern Europe.

Romania had to raise overnight interest rates to 900pc on Wednesday to stem capital flight, recalling the wild episodes of Europe's ERM crisis in 1992. The CDS spreads on Ukraine's debt have topped 2,800, signalling total revulsion by investors.

Rating agency Standard & Poor's issued a downgrade alert on Russian bonds yesterday, warning that a series of state rescue packages worth $200bn (£124bn) could start to erode the credit-worthiness of the state.

S&P said Russia's budget was likely to slip into deficit in 2009 as result of the dramatic slide in oil and metal prices this autumn, and cautioned that "the ongoing concentration of the financial system in state hands" had become a political risk.

Russian companies must roll over $47bn of foreign loans over the next two months, and a further $150bn or so next year, a task that has become close to impossible as investors flee Eastern Europe.

The default of Russia, will be systemic. But it won't be in just Russia's neighboring countries. It will be felt in Latin America. We see that already with the strength of the dollar. There is a massive flight out of any currency not denominated in dollars. Money will be pulled with lightning speed from the South American countries, as they depend on their wealth from natural resources. With pricing for all commodities in the toilet, and getting ready to be flushed lower, this move will be especially acute. And that's when we will start to see the rest of these derivative bets blow up; those that Greenspan said was just a "fault' in the model he used to assess the system.

So let's call this next systemic rupture the "Denali" fault, since those in denial of the repercussions of derivatives, will now find that their cute explanations are tragically wanting. That earthquake, caused the planet to vibrate for two weeks after it happened.

And now we are just starting to feel the tremors of the systemic meltdown in derivatives. But this time it's starting, not with obscure off balance sheet arrangements or in alphabet soup products, but with countries.

And that's what people worldwide can understand.

Which is why we are locked limit down.

Thursday, October 23, 2008

Maiden Lane portfolio of the Federal Reserve drops

Maiden Lane, which was valued at $29.137 billion, and which was the portfolio the Fed took from Bear Stearns, has now been adjusted downward in it's quarterly evaluation. See Table 2 in the following link:

The portfolio is now being estimated at $26.802 billion. And this is a Level 3 valuation. The Fed is assuming that "Fair value reflects an estimate of the price that would be received upon selling an asset if the transaction were to be conducted in an orderly market on the measurement date. Revalued quarterly. This table reflects valuations as of September 30, 2008."

Expect this to get some press tomorrow.

Chinese factories are going bust

A sobering story in USA Today on China.

SHAOXING, China — In the good old days — oh, three months ago — Tao Shoulong would prowl the streets of this ancient city in his Mercedes-Benz. His wife and partner, Yan Qi, would cruise around in her Toyota Land Cruiser. Together, they would drink into the night with clients, suppliers and creditors, hatching plans to expand their Zhejiang River Dragon Textile Printing & Dyeing Co.

Tao built River Dragon from a start-up with four employees into one of China's biggest textile printing firms in just five years. He had even grander dreams: He wanted to see his company's stock trade on Nasdaq alongside the likes of Microsoft and Intel.

The dreams are dead. River Dragon shut down on Oct. 7. Tao and Yan have vanished, leaving behind more than $290 million in debt and a lot of anger in this city 140 miles south of Shanghai in the Yangtze River Delta. The company's demise put 4,000 workers on the street and jilted hundreds of suppliers and creditors.

The speedy rise — and speedier fall — of River Dragon is a depressingly familiar story in China these days. Thousands of Chinese factories have shuttered in the past year, done in by:

•An export-killing global slowdown that began with the collapse of the U.S. housing market and the ensuing financial crisis. Local textile merchant Fang Xingquan, a River Dragon creditor, is among many who believe a sharp drop-off in exports was a key factor in the company's demise....

The Chinese economy is absorbing another blow beyond crumbling exports: collapsing home prices. Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington, D.C., reckons a slowdown in construction could shave another 1 to 2 percentage points off China's economic growth.

It's not just China. Japanese stocks are at four year lows in this Bloomberg article.

Four year lows? They are almost back to the lows in 1982! That is what a deflationary environment does to stock prices.

Deflation is like Humpty-Dumpty. Once prices start falling, it's pretty hard to put the pieces back:

Humpty Dumpty sat on a wall.
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again.

And all the Fed's targeted programs to the banks won't put Humpty back together again!

Greenspan: "shocked disbelief that markets didn't self regulate"

Self regulate? They all had the same toxic securities on their books. Why else won't the banks trade with each other? The only banks lending money to each other are those daisy chaining money back and forth who have had government money injected.

The banks, always retained the "risk" in the products that they used to "mitigate" risks. It's just that they kept these securities off of their balance sheets or in mark-to-myth pricing.

Potash continues to waste money on buybacks

Potash, with their earnings release today, still continues to believe that they can gouge farmers with excessively high prices for fertilizer. They've drunk their own kool-aid, as they bought back over 15 million shares of stock at an average price of over 183, and just finished picking up almost 5 million shares in the latest quarter at $175; $100 over the current price of the stock.

Potash will eventually be the poster child of arrogant and out of touch management, who burned through shareholder money in a commodity business, by buying back stock at 10X the price it was just a few years back, throwing money away in stock buybacks, and auction rate securities that have lost 2/3 of their value. And they knowingly did this in a worldwide recession and in a worldwide credit crunch. But then, they had one of Wall Street's "best" advising them!

But then again, they had the cheering of analysts. But they had no cheering here!

Look for estimates to come down.

Here's the press release on today earning's:

During the three months ended September 30, 2008, the company repurchased for cancellation 4,964,500 common shares under the program, at a cost of $870.7 and an average price per share of $175.38. The repurchase resulted in a reduction of share capital of $23.3, and the excess of cost over the average book value of the shares of $847.4 has been recorded as a reduction of retained earnings. During the nine months ended September 30, 2008, a total of 15,820,000 shares were repurchased at a cost of $2,902.9 and an average price per share of $183.50, resulting in a reduction of share capital of $73.8 and a reduction in retained earnings of $2,829.1.

Foreclosure filings up 70%

WASHINGTON (AP) -- The number of homeowners ensnared in the foreclosure crisis grew by more than 70 percent in the third quarter of this year compared with the same period in 2007, according to data released Thursday.

Nationwide, nearly 766,000 homes received at least one foreclosure-related notice from July through September, up 71 percent from a year earlier, said foreclosure listing service RealtyTrac Inc.

Wednesday, October 22, 2008

Stock market risks increase

Markets in Asia are falling apart. The Euro and Pound are now in a free fall against the dollar. Now we see that many Latin American companies are losing vast sums of money, because they gambled huge sums on currency bets:

Throughout Latin America, companies are telling investors they have lost millions, in some cases billions, of dollars due to foreign-exchange gambles that, in some cases, had little to do with their core businesses.

A few days ago, we found out that Citic Pacific lost $2 billion speculating in currencies. Does anybody think that these are only isolated cases? And these are the bets made on napkins--The currency derivative bets whose losses we only find out when they go sour. And I'll bet these are the "double-up" swaps. What that means is, when someone wants to hedge their currency, these sophisticated investment banks, convince these companies, that they can hedge their bets for less cost. The catch is, that when the currency moves against you, after a certain point, the deal will double. Now you have twice the problem, in a losing position.

Remember in 1995 when the Indonesian noodle maker lost $300 million on these "double up" swaps, when they were hedging their rupiah? Look at the games now played in our financial market. How much larger are these losses now? They will be staggering.

Like a forest fire, deleveraging will hit all aspects of the economy. Mortgages were just where the losses came first. We then saw it in the market's wild swings with hedge fund deleveraging and jettisoning their stocks. We see it in the price of oil where speculators, who juiced the price are now getting killed. Now we are seeing it in currencies and in the currency derivative bets. Yesterday, the WSJ brought up another beauty-the unwinding of synthetic CDO's:

LONDON -- A recent rash of bank failures is wreaking havoc on a large but little-known corner of the credit markets, in a development that could mean more write-downs for banks and higher borrowing costs for companies everywhere.

Even as some lending markets begin to recover from last month's demise of Lehman Brothers Holdings Inc., the securities firm's default -- together with those of other U.S. and European banks -- is causing new dislocations in the multitrillion-dollar market for complex investments known as synthetic collateralized debt obligations.

That could mean trouble for banks, hedge funds and insurance firms around the world, which used synthetic CDOs as a way to invest in diversified portfolios of companies without actually buying those companies' bonds. Many synthetic CDOs contain a heavy dose of exposure to financial companies, including Lehman, U.S. thrift Washington Mutual Inc. and recently nationalized Icelandic banks Glitnir Bank hf, Kaupthing Bank hf and Landsbanki Islands hf.

But it doesn't stop here. How about the costs in underfunded pensions on corporations balance sheets? Goldman came out with a scare piece on that yesterday to tag team JPMorgan's warning Monday:

The recent erosion of pension plans could potentially hurt profit at aerospace and defense companies profit, an analyst warned Monday.

JPMorgan analyst Joseph Nadol told investors that the funded status of pension plans among companies like L-3 Communications Holdings Inc., Lockheed Martin Corp. and Raytheon Co. could slip this year to a range of 70 percent to 80 percent due a falloff in current asset values.

At the end of 2007, plans at Boeing Co., Northrop Grumman Corp., Lockheed Martin and United Technologies Corp. were at least 90 percent funded, according to Nadol.

But with sizable changes in market performance and interest rates over the past two weeks, plans have declined, which could force companies to pay higher cash contributions to maintain requirements.

"The expected decline in plans' funded status will likely require additional cash contributions," Nadol, wrote in a note to clients.

He estimated that funding requirements could force an annual cash contribution of roughly $550 million at Lockheed Martin and contributions in the range of $200 million to $350 million at Boeing, Northrop Grumman and Raytheon

Goldman also had a piece on pensions but let me bring your attention to this article in the NY Times, with commentary from a Goldman analyst:

But few companies today meet that standard. A study by Goldman, Sachs & Company, the investment banker, shows that the use of high interest rates is widespread among pension plans of Fortune 500 companies.

Of 366 concerns surveyed, 300 based their valuations on rates higher than 7 percent. The overwhelming majority used rates of 8 percent to 9 percent, and some were as high as 12 percent. Only eight companies in the survey used rates below 7 percent.

"Many companies are vulnerable if they are forced to reassess the interest rates in their pension plans," said Gabrielle Napolitano, a portfolio manager and author of the Goldman, Sachs report. "This is something that will increase their pension liability, and could constrain corporate cash flow as companies may have to make bigger contributions to their pension plans."

Wait, I forgot to mention one thing. This piece was written, November 29, 1993! In 1994 the S&P was down 1.47%, but 1995 was up 34.1%, 1996 was up 20.27%, 1997 was up 31.02%, 1998 was up 26.67%, and 1999 was up 19.51%. Obviously these liabilities became an asset. But it's the same story. History repeats itself.

Pension problems, by definition come out after stock prices are down considerably, but it doesn't mean it can be dismissed. The blue chip companies are the ones with the best pension plans. And an unfunded liability, will just make investors compress the multiple of which they'll pay for the companies that are supposedly safe.

Besides credit risk, market risk, execution risk, and economic risk, we also have stupidity risk. And this time, the stupidity isn't from bankers, but from CEO's. We have had a rash of buy-outs that haven't been completed because of core incompetency at the top. How did Jerry Yang from Yahoo turn down $31 cash from Microsoft? How did Bill Miller say that price undervalued YHOO? Now it's 12! SanDisk got a cash bid for $26 from Samsung, that the Chairman Dr. Eli Harari said substantially undervalued the company. Yesterday, the Nikkei news service said that Samsung was going to go forward with the deal. They didn't. So you now have "information" risk in this market. Today the stock is under 12 after Samsung withdrew the offer. No one yahooing here either!

Now we have to contend with country risk. First it was Iceland melting. Now Argentina is on the verge of defaulting on their debt, and hijacking their pension system.

Tomorrow on deck, we get the lies from our Federal Reserve, when they allegedly will tell us how much the bonds that they own from Bear Stearns are supposedly worth. Maybe they can have the TARP buy those.

And then, we get the early OPEC meeting, with their vain attempt to stabilize oil prices. They don't have a snowball's chance in hell of pulling that off.

And now that Argentina is on the ropes, what will happen next to those rogue nations that are dependent on oil for their economic well being?

The risks in this market just seem to get greater each day.

Tuesday, October 21, 2008

Remember the good old days?

As the global economic crisis hits its one year anniversary, it is time to re-examine not just the strategies for dealing with it, but also the diagnosis underlying those strategies. Is it not now clear that the main macroeconomic challenges facing the world today are an excess demand for commodities and an excess supply of financial services? If so, then it is time to stop pump-priming aggregate demand while blocking consolidation and restructuring of the financial system.

The huge spike in global commodity price inflation is prima facie evidence that the global economy is still growing too fast. There is nothing sinister in this. The world has just experienced perhaps the most remarkable growth boom in modern history. Given the huge cumulative rise in global growth during the 2000s it is little wonder that commodity suppliers have found it increasingly difficult to keep up, even with sharply rising prices.

This was written July 28! If the editorial boards then were worried about runaway commodity prices, does that mean the same pundits that today are warning us about declining stock prices and the Great Depression II will be just as chastened?

More Federal Reserve alphabet soup

Now we have the creation of the MMIFF (Money Market Investor Financing Facility) with eligible PSPV's and ABCP's at least rated by NRSRO's so the FBRNY will loan on it. Now we have the CPFF (Commercial Paper Funding Facility), as well as the AMLF (Asset Backed Commercial Paper Money Market Mutual Fund Liquidity Facility)..ah what the it all here from the Federal Reserve's website:

Another $540 billion program by the Federal Reserve, just equals more alphabet soup!

Apple beats numbers again.

Let's look at Apple in this market:

-Apple is sitting on $25 billion of cash.
-Apple has no debt.
-Apple sold more iPhones this quarter than Research in Motion!
-Apple has the strongest product line in technology.
-Apple generated $9.1 billion of cash in fiscal 2008.
-Apple, with it's conservative accounting, is developing a huge income stream, with $4.8 billion of deferred revenue for the current quarter, and non GAAP earnings of $2.69.

Apple consistently understates it's financial power and guidance. But in this market, every stock is a battleground. So they sell it down 7, and then buy it up 10!

$25 million for two months???

Peter Kraus, head of strategy at Merrill, won't be included in a broader announcement expected as soon as this week about which top executives are staying once the purchase is completed by year end, these people said. As a result of the takeover, terms of Mr. Kraus's contract have changed and will trigger the exit payment. Mr. Kraus was owed this money and would have collected it eventually had he stayed with Merrill, one person familiar with the contract said. He could leave with as much as $25 million.

Mr. Kraus, a former Goldman Sachs Group Inc. executive who started at Merrill in early September, was recruited by John Thain, the CEO of Merrill. Put in charge of growth-and-acquisitions strategy, Mr. Kraus wound up advising Mr. Thain on gloomier options as Merrill was battered by market turmoil. This included a possible sale of a piece of Merrill to Goldman Sachs and the firm's eventual sale to Bank of America, based in Charlotte, N.C.

So taxpayers, help pick up his tab from another Goldman alumni. Don't think there won't be outrage on this!

Consumers buy generic

Why wouldn't the consumer trade down? They traded down in shopping, and now they are trading down in personal care items and detergent and toilet paper.

Oct. 21 (Bloomberg) -- Procter & Gamble Co. and Colgate- Palmolive Co. led U.S. consumer companies in raising prices to counter higher costs, taking the risk that consumers would switch to generic brands if they raised them too much.

Last quarter, the risk didn't pay off, as generic brands attracted consumers beset by higher food and fuel costs.

U.S. sales of store-brand household and personal-care products rose 8.9 percent in the four weeks ended Oct. 4, according to a study by Bernstein Research. By contrast, sales of products such as soap and dish detergent increased by 2.3 percent at P&G and 1.3 percent at Colgate, according to the Oct. 17 report. In the year-earlier period, sales of private- label products increased 2.4 percent, according to Bernstein.

Battered by increased expenses, consumers are stretching household budget dollars by slowing purchases of higher-priced products like P&G's Bounty paper towels and Kimberly-Clark Corp.'s Kleenex facial tissues. Kimberly-Clark will report earnings tomorrow.

Bernanke begs Obama to keep his job

Anyone see this WSJ headline-Bernanke Endorses Obama?

Ben Bernanke apparently wants four more years as Federal Reserve Chairman. At least that's a reasonable conclusion after Mr. Bernanke all but submitted his job application to Barack Obama yesterday by endorsing the Democratic version of fiscal "stimulus."

While the Fed chief said any stimulus should be "well targeted," even a general endorsement amounts to a political green light. Mr. Bernanke certainly knows that Mr. Obama and Democrats on Capitol Hill are talking about some $300 billion in new "stimulus" spending, while President Bush and Republicans are resisting. And by saying any help should "limit longer-term effects" on the federal deficit, he had to know he was reinforcing Democratic opposition to permanent tax cuts.

Why is Bernanke now genuflecting to Obama? Probably because he reads the papers, as Former Chairman Volcker now seems to have Obama's ear:

Mr. Volcker has emerged as a top economic adviser to Sen. Barack Obama during a presidential campaign dominated by a global financial crisis. Their growing bond is paying dividends for each man.

Mr. Volcker delivers gravitas and credibility to Sen. Obama, people in the Obama camp say, as well as ideas and approaches to the economic crisis. "Volcker whispering in Obama's ear will make even Republicans comfortable, because he's a hero of the right and a supporter of a strong dollar," says John Tamny, a supply-side economist and Republican.

On Tuesday, Mr. Volcker is scheduled to appear on the campaign trail with Sen. Obama for the first time. At a round-table discussion with voters in Lake Worth, Fla., he'll "give his view on the state of the economy and the credit markets, and what needs to be done to fix them," says one campaign adviser. Longtime Fed watchers are amused that Mr. Volcker, known for his muttered statements during Fed meetings in the 1980s, will be in a political role on the stump.

Monday, October 20, 2008

"Government" Sachs

Deutsche Bank cuts oil price estimates

$60 a barrel in 2009.
$58 a barrel in 2010.

What hat did they pull these figures out of? At those prices, oil would be stimulative to the economy.

On April 28, they had this to say:

There is a ``huge risk'' that oil prices will continue to rise until demand collapses because additional supplies are limited and alternative fuels decades away from replacing crude, Deutsche Bank AG said.

``There is a huge risk that the oil price simply continues to escalate until it gets to some level ($200 a barrel?) when demand finally collapses because ordinary people can no longer afford to burn as much energy as they are burning now,'' Deutsche Bank's chief energy economist Adam Sieminski wrote in a report dated April 25.

Oil demand previously collapsed in the early 1980s, after nominal oil prices rose tenfold between 1970-73 and 1980-83, to $35 a barrel from around $3.50. Oil averaged about $25 a barrel from 2000-03, suggesting prices would have to increase to $250 a barrel in 2010-13 to have the same impact on oil users this time around, Sieminski said. Deutsche Bank's price forecast for Brent and West Texas Intermediate oil next year is $102.50 a barrel...

Additional oil supplies will come only from the Organization of Petroleum Exporting Countries, which produces 40 percent of the world's oil, because non-OPEC output will need ``enormous levels of investment'' just to maintain current levels of production.

On June 27, Deutsche Bank upped their oil forecast again:

Deutsche increases their 2008 average oil forecast to $119.30/bbl from $95.50/bbl and 2009 average oil forecast to $120/bbl from $102.50/bbl. In addition, the firm long term oil price forecast for 2013 has been increased to $115/bbl from $81/bbl.$95;+Reiterates+Buy/3776701.html

On September 28, Deutsche Bank cut their oil price target to $92.50.

Now they are down to less than $60.

Maybe the biggest risk to oil prices, is Deutsche Bank's forecasting!

Sunday, October 19, 2008


Judging by the latest article in the Financial Times, it seems as though our Fed still doesn't want to recognize deflation:

Some worry this could end in deflation. Senior Fed officials admit they cannot completely rule it out. However, Fed simulations with even severe recessions do not result in falling core prices, due to the high initial level of inflation, firm expectations and a weak relationship between unemployment and prices.

Standard models suggest that the US central bank should cut rates further from 1.5 per cent to 1 per cent and possibly lower, and do so quickly.

Policymakers will probably end up doing this. But senior Fed officials are unenthusiastic, worrying that further rate cuts will not have much impact and this could weaken confidence further.

At best, they now see rate cuts as a secondary issue, compared with bank recapitalisation, asset purchases, borrowing guarantees and Fed commercial paper purchases.

The Fed should get rid of their models, and take a look at real life. Russian and American billionaires are going bust in this deflationary environment, along with blue collar Joe and Mary Sixpack.

Even the Wall Street Journal finally recognizes deflation:

Policy makers navigating the U.S. through the global credit crisis may have a new concern on the horizon for 2009: deflation.

The risk of deflation -- generally falling prices across the economy, beyond volatile energy and food costs -- remains slim. But the financial shock and a faltering economy can set the stage for a deflationary environment.

Federal Reserve officials view broad-based deflation as unlikely but possible. Federal Reserve Bank of San Francisco President Janet Yellen said in a speech this week that the plunge in oil prices along with slackening demand for labor and goods should "push inflation down to, and possibly even below, rates that I consider consistent with price stability."

2009? It's already here, along with the recession. According to Ernst & Young, it will take until 2011 in the UK, until consumer spending turns positive. They deal in reality. The Item Club report, which also predicts another 500,000 people will lose their jobs, provides a clear illustration of how the turmoil in the financial sector has spread "like a pandemic" from the City to "every part" of the lives of ordinary families.

What makes our Fed, think our consumer is any different?

It's no wonder the Europeans and the US are clashing!

Saturday, October 18, 2008

The recession hits the sports memorabilia market

Mickey Mantle's 1949 Plymouth P-18 sold for $34,000 at the NY Yankee Stadium memorabilia auction, down from pre-sale estimates of $50-70,000, showing that the recession has even hit Yankee fans. Here's the story:

NEW YORK (AP) -- Not even Yankee pride can overcome the poor economy.

The last ball hit out of Yankee Stadium didn't leave the auction block Saturday in a memorabilia auction celebrating Bronx Bombers history.

The ball, smacked by catcher Jose Molina on Sept. 21, was one of several big ticket items that failed to sell in early bidding at Madison Square Garden on a trove of Yankees artifacts.

It was expected to fetch up to $400,000, but was pulled after offers fell short of the suggested opening bid of $100,000.

At least one fan on hand for the sale was disappointed.

"I was at that game. I sat in the upper deck up in right field," said Scott Melman, 24, of Manhattan. "I was hoping to see that ball go."

A collection of 15 World Series and American League championship rings that once belonged to former Yankees owner Del Webb was also pulled by the Guernsey's auction house after the high bid of $325,000 fell short of expectations.

The gold rings from 1947 to 1964 had been expected to sell for up to $700,000.

More than 400 items linked to the storied franchise were on the block, including Babe Ruth and Lou Gehrig's insurance policies, old ticket boxes and game balls, and more than 100 architectural drawings of the original Yankee Stadium.

More than half of the items came from a New Jersey collector.

About 100 people came to the Garden and bid several hundreds of dollars for baseball card vending machines, pictures of Yankee Stadium under construction and posters signed by Mantle and Joe DiMaggio.

Mickey Mantle's 1949 Plymouth convertible, expected to fetch between $50,000 and $70,000, sold for $34,000.

Bids were expected later Saturday for a three-page handwritten letter that Mantle wrote to his then-fiancee in 1951, a month after his arrival in New York City.

A 1918 pitching incentive agreement for Ruth was expected to fetch bids as high as $900,000. The stained, handwritten document offers Ruth an extra $1,000 if he won 24 games, and $2,000 if he won 30 games in the 1918 season.

"It brings memories back of when I was a kid," said Joseph Pierre, 70, peering through glass at photographs of DiMaggio. And Pierre doesn't even root for the Yankees.

"I'm a Dodger fan," he said, "but I love baseball."

Molina's home run ball, hit in the Yankees' 7-3 win over the Baltimore Orioles on Sept. 21, was caught in the stands by Wyoming state legislator Steve Harshman .

The classic problem that no one wants to recognize

Everyone seems to be looking for bottoms. Why bother? Look at the bottom in 2002. We hit our low, spiked up and rallied, only to revisit the low three months later.

But the economic situation today is much worse, and the pain is as entrenched, as the wealth which has evaporated. Also in 2002, we had a Fed Chairman that cut rates low enough to allow the economy to expand, and any problems at bank's and brokerage firms could be papered over by derivatives. And then the rich were still immune from the economies travails. Now even Carl Ichan is selling his yacht!

Next we are soon going to have Fuld in a perp walk, who kept assets marked up while the Federal Reserve Chairman's right hand man, Timothy "know nothing" Geithner, was looking over Lehman's books. Why doesn't anyone subpoena him to ask him what he saw? It would be nice to hear an "I don't know" or "I don't recall" or "I was unaware" from a Fed official, even if it was under a magistrates direction, instead of the pollyanna press who has anointed him the market's next "savior."

Geithner only recognized the problem at Lehman the night before it imploded. His suggestion then, was to have 30 banks put up $35 billion for $85 billion of Lehman's assets in a fund called the "bad company" so somebody else could buy the "good company." Yes, the good company, that bought the bad company's assets! How about his advisors that were pouring over Lehman's books in April? Didn't they see anything amiss? Didn't they take a lead from any of the vocal shortsellers who already did?

In his testimony before the Senate about Bear Sterns, Geithner said "we only lend to sound institutions." Does that mean Lehman then, was sound? How about in June, when he was speaking before the San Fransico Fed and he said, "A classic problem in financial crises is to distinguish between problems of illiquidity and insolvency." Since the Fed was lending to Lehman, and since the Fed lends only to solvent institutions, didn't that mean then that Lehman was just having a liquidity crisis? Isn't that why these alphabet soup lending programs were set up? But it was never about liquidity. It was always about solvency! And Lehman was insolvent!

And if "no one" recognizes the difference between illiquidity and insolvency what does this make Geithner? No wonder no one uses logic!

So how is Geithner applauded, when he picked the wrong road,on the financial crisis? Geither was one of Lahde's low hanging fruit!

"The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America."

In fact, the TimesOnline has already appointed him as the new Treasury Secretary in an Obama administration. That same fluff piece also had this to say:

Tipped in Washington as the next US Treasury Secretary in the event of a win by Barack Obama, he has been shown at his best in a crisis in recent months. He has spent the past year getting his head round credit derivatives, with fortuitous timing.

What timing! He and Bernanke both decided to take a crash course in derivatives, after the derivative market, and the market's that is is derived off has crashed, and yet he deserves plaudits for knowing now what he didn't know then, even though he oversees the nation's banks?

Of course, before the Fed's alphabet soup programs, it was the SEC that had the authority to pour over the investment banks books, so maybe they should also ask Christoper Cox! But does Chris Cox get any good press?

He spends all his time investigating those that spread "rumours" about Lehman.

What the stock charts "says."

SEC to accuse Bear Stearns of mismarking assets?

Here's the link and the the story:

s the SEC preparing to accuse Bear Stearns of intentionally mispricing assets to avoid taking write-offs? That's what is suggested in a story that shows up on Google as being published an hour ago by the Wall Street Journal. The actual story, however, doesn't appear on the Journal's site.

We called the apparent author, Kara Scannell, to ask her about the story. She couldn't immediately explain what was happening.

Here's our theory. The SEC may be preparing to announce its findings of Bear Stearns misdeeds. They've leaked the story to Scannell ahead of time, and Scannell agreed to embargo the story until it was officially released. Somehow it wound up in the Wall Street Journal's feed, however, and got picked up by Google. We don't know that for sure, of course. It just seems like a plausible explanation.

A previous case against Bear was thrown out because of the personal relationship of the lawyers involved.

In one of several scathing reports released in recent weeks, the Securities and Exchange Commission's inspector general said that a senior SEC official closed a long-running case against Bear Stearns amid an "ongoing personal relationship" with the lawyer representing Bear in the matter, who was a former colleague at the SEC.

It's not just Bear Stearns with their marks on the assets that were on their books. We'll soon find out if the Federal Reserve is mis-marking assets also. On October 23, they come out with the marks on Bear Stearn's toxic assets that they took on their balance sheet!

It used to be that those that "mis-marked" assets could use the Dick Fuld defence. Anybody care to use that now?

Maybe they can appeal to the Federal Reserve!

Friday, October 17, 2008

World stock markets are on sale

A letter from a hedge fund manager (up 800%) worth reading!

October 17, 2008

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life – where I had to compete for spaces in universities and graduate schools, jobs and assets under management – with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man's interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft's near monopoly. I believe there is an answer, but for now the system is clearly broken.

Lastly, while I still have an audience, I would like to bring attention to an alternative food and energy source. You won't see it included in BP's, "Feel good. We are working on sustainable solutions," television commercials, nor is it mentioned in ADM's similar commercials. But hemp has been used for at least 5,000 years for cloth and food, as well as just about everything that is produced from petroleum products. Hemp is not marijuana and vice versa. Hemp is the male plant and it grows like a weed, hence the slang term. The original American flag was made of hemp fiber and our Constitution was printed on paper made of hemp. It was used as recently as World War II by the U.S. Government, and then promptly made illegal after the war was won. At a time when rhetoric is flying about becoming more self-sufficient in terms of energy, why is it illegal to grow this plant in this country? Ah, the female. The evil female plant -- marijuana. It gets you high, it makes you laugh, it does not produce a hangover. Unlike alcohol, it does not result in bar fights or wife beating. So, why is this innocuous plant illegal? Is it a gateway drug? No, that would be alcohol, which is so heavily advertised in this country. My only conclusion as to why it is illegal, is that Corporate America, which owns Congress, would rather sell you Paxil, Zoloft, Xanax and other additive drugs, than allow you to grow a plant in your home without some of the profits going into their coffers. This policy is ludicrous. It has surely contributed to our dependency on foreign energy sources. Our policies have other countries literally laughing at our stupidity, most notably Canada, as well as several European nations (both Eastern and Western). You would not know this by paying attention to U.S. media sources though, as they tend not to elaborate on who is laughing at the United States this week. Please people, let's stop the rhetoric and start thinking about how we can truly become self-sufficient.

With that I say good-bye and good luck.

All the best,

Andrew Lahde

JP Morgan's Lee tries again

Back on June 6th, JP Morgan strategist Thomas Lee came on CNBC and said to buy stocks on the bad unemployment number. He said surges in unemployment happen at the end of the cycle. Unfortunately, then, we were just at the beginning of the decline in employment; not at the end.

Now for those who have lost 30% of their money since June 6th, JPMorgan strategist Thomas Lee has has come out with the "Franchise 16" stocks that can weather the current economic storm.

3M Co.
Baxter International Inc.
Colgate-Palmolive Co.
CA Inc.
Devon Energy Corp.
General Mills Inc.
Gilead Sciences Inc.
Google Inc.
Hewlett-Packard Co.
McDonald's Corp.
Merck & Co.
Monsanto Co.
Nucor Corp.
Philip Morris International Inc.
Union Pacific Corp.
Visa Inc

This time, the promise is not that these stocks will move higher, but that they will out-perform the stock market during the coming "global recession."

At least now they recognize the recession that they didn't previously see!

Barakett brothers blow up

Atticus Capital, the hedge fund run by Tim Barakett is down around 40%, and now his brother's Bret fund, Tremblant Capital, was down 27.9% at the end of September, and Tremblat Concentrated was down 40.1%. Assets with him are down to $2.1 billion from $4.5 billion.

Here's the link to the story in today's NY Post.

In today's WSJ, we read that "Some hedge-fund managers are coming under increased pressure to liquidate their positions as banks ask for more collateral to back funds' borrowing..."

On Wednesday's meltdown, there were rumours that Citadel Investments, was liquidating positions, and a blogger that posted an estimated return for Citadel was forced to retract the story. Here's that story:

If you're going to shame a "website" for putting up what was in fact a rumor, don't send David Faber out on the air an hour later to muse that "Citadel has been down around 26 percent- or so they say" and then "from what I'm hearing, there are a lot of questions about forced selling out there."

It looks, however that the blogger was right. From the WSJ:

Much as investors fretted about investment banks that relied on heavy leverage to boost returns, the focus now is on hedge funds that are perceived as big borrowers. Ken Griffin's Citadel Investment Group has racked up annual returns of as much as 30% for its largest hedge funds in recent years, but last year, it held about $7 of investments for each $1 it held. That figure has come down to about $4 this year. The firm holds about one-third of its asset of cash and has expressed confidence that it is well hedged. Still, Citadel's largest fund is down about 32% through Oct. 10.

If you manage $30 billion, and you are leveraged 4 to 1, and you are down 32%, I guess you can get a little testy when someone talks about your performance!

Buffett: Buy American. I Am

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.