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Welcome to the world of Dow Theory Analysis SAC – a company dedicated to the production and distribution of accurate, reliable analysis as it relates to financial and equities markets. We are a small privately held company duly constituted and established in Lima, Peru. The staff at Dow Theory Analysis’ has been performing market related analysis for more than twenty years. We serve you by fulfilling one purpose and one purpose only: we do unbiased market analysis for our own account as well as anyone willing to pay for our services.
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| CRISIS COGITATIONS - ALF FIELD NOV 13 |
Crisis Cogitations
Alf Field
13 November, 2008
Everyone must be wondering where this "unprecedented global financial crisis," (the World Bank's words), is heading. What follows, for what they are worth, are my cogitations on this crisis...
There is no doubt that the world is dealing with a credit/debt deflation of historic proportions. It is worth spending a little time understanding how such events are precipitated. An economy, as in personal households, corporations and other entities, is financially sound when expenditures are less than incomes. The difference can be saved and invested to produce additional income and capital growth in the future.
When debt is introduced into the system, a different dynamic emerges. We are not talking about self-cancelling debt but new consumer debt which is spent in the economy. This results in expenditure exceeding income and delivers a boost to the nation's GDP. In the initial stages the boost to GDP is quite large but as time goes by and the debt total climbs higher, the cost of servicing that debt reduces the economic benefit received from new increases in the debt mountain.
A continuing supply of easily available and cheap debt leads to speculative bubbles in one or more of the following areas: real estate, financial assets, commodities and collectibles. Once a bubble gathers momentum, a positive reinforcing feedback loop develops. More debt pushes up asset prices and this higher collateral value permits more borrowing which in turn pushes up asset prices which provides collateral for further increases in borrowing, and so on.
Eventually when debt becomes excessive, reaching extreme and unsustainable levels, an extraneous event occurs that shatters confidence and destroys the rationale that was underpinning the bubble. This results in assets being sold to repay debt and a downward reinforcing feedback loop develops. Asset sales reduce the prices of those assets, which diminishes their collateral value, which causes lenders to demand more security, which causes more asset sales, and so on. Weaker lenders go bankrupt and the economy starts to collapse into recession and possibly depression.
It is impossible to time the peaks of these debt bubbles as they can develop a life of their own that continues for longer than any rational person would think possible. In the recent debt binge we were blessed (cursed?) with bubbles in all four categories, real estate, financial assets, commodities and collectibles. Combined debt in the USA has been estimated to have exceeded $50 trillion, which is 3.5 times the estimated $14 trillion GDP level of that country. This is at least a 30% greater ratio of debt to GDP than was achieved in 1929 just prior to the last great debt deflation.
Once debt becomes excessive, and there is little doubt that this status was achieved some time ago, debt cannot be repaid out of savings and must be repaid in one of the following ways:
- Via bankruptcies, which causes lenders to wear the losses of debt failures, but eventually the broader community also suffers from the economic depression that follows;
- Via a rapid debasement of the currency which allows debt to be repaid in currency with vastly reduced purchasing power. Lenders are repaid but suffer a reduction in the purchasing power of their capital. The broader community suffers from massive price inflation and the economic dislocations that flow from this.
- Via a combination of the above two methods where there are initial bankruptcies followed later by a lesser degree of currency debasement than that contemplated in 2 above. This appears to be the course that the world leaders are headed towards by their actions to date.
There are 3 major differences between the present debt deflation and prior episodes. They are very important differences and will probably impact on whatever new decisions our political leaders take to ameliorate the crisis. These new factors are:
- Modern economies are linked by an electronic global interconnectivity which assists modern commerce and trade to operate smoothly. This system relies on the ability of banks around the world to readily respond to transactions elsewhere. If you use your credit card to withdraw funds from a Moscow ATM, the Russian bank must have instant certainty that the funds will be delivered from your bank to settle the cost of the cash withdrawal. This global electronic system has been developed over the past 30 years and we now have electronic money. People are paid electronically and make payments out of their bank accounts electronically. Modern commerce and industry relies on this electronic system in order to function properly.
- OTC derivatives did not exist 30 years ago but have become an important aspect of modern commerce, investment and banking. These instruments are now massive in quantity and have the potential to deliver staggering losses. They have already become a destabilising influence in the world banking and economic systems. A major problem is that these losses cannot be quantified and nobody knows where they will settle, leading to distrust between banks.
- For the first time in history a world wide debt deflation is occurring in a situation where virtually all countries have the ability to create unlimited quantities of their own local currencies at will.
If the modern global banking electronic interconnectivity system breaks down, world commerce will grind to a halt and the world will almost certainly be pitched into an economic depression. The continued operation of the system requires banks to have confidence in each other and knowledge that the overall system works.
One area where the system is breaking down is in large international trades for which special settlement systems called Irrevocable Letters of Credit (ILC) are used. There are special difficulties when the physical transactions are large in quantity and value, when the buyer and seller are in different countries and when lengthy sea voyages are required. The buyer does not want to pay for the shipment until he is certain that he will receive it and that it meets specifications. The seller, on the other hand, does not want to ship the goods until he is certain that he will be paid.
The solution is for the buyer to go to his local bank and open an ILC in favour of the seller's bank, or possibly his bank's agent bank in the seller's country. Irrevocable means just that, it cannot be cancelled once it has been issued. It is effectively a guarantee by the buyer's bank to the seller's bank that once the shipment arrives in the buyer's home port and is of correct specification, the seller's bank can pay the seller under the ILC and claim the money from the buyer's bank.
What has happened in recent months is that these international trades are grinding to a halt because sellers are saying to buyers: "We don't trust the ILC from your local bank. Go and get an ILC from a bank that we trust". This is why international trade has hit a brick wall recently and why the Baltic Dry Goods index, which measures the shipping costs for dry cargoes, has declined incredibly by 90% in just a few months! It is also the reason for the most recent sharp decline in commodity prices.
It is like trying to pay for your restaurant meal in a foreign country and the restaurant refusing to take your credit card because their local bank is not prepared to do business with the bank that issued your credit card.
Stimulus packages and bailouts are helpful but will prove to be of no avail unless confidence in the banking systems of the world is restored. It cannot be stressed strongly enough: it is imperative to restore confidence in the banking systems around the world. If this is not done quickly, world trade will grind to a halt and the world economy will do likewise. How does one achieve this resurgence of confidence in an environment of debt deflation with proliferating bankruptcies?
There seems to be only one option. Governments will have to take control of their national banking systems and be responsible for all the bad debts, including the unquantifiable OTC derivative losses.
Nationalisation is anathema to those bred in a free enterprise system. Economists of the Austrian school argue that the deflation should be allowed to run its course. They say that this would speed up the process of debt liquidation and reduce the pain in the longer run. The immediate consequences of this would be horrific and would certainly bring down the world's banking systems in the current environment. The issue at the moment is not whether the Austrian school is correct or not, but rather what our leaders will do and what the consequences of their actions will be.
Unfortunately, some form of nationalisation or Government guaranteeing of banks around the world seems to be the logical expectation. Short of this, we are headed for a depression of the 1930's variety, or something worse, and nobody wants to experience that.
Having nationalised (or guaranteed) the banks, the problem of how to handle the debt will still remain. If we accept that option 3 above - part deflation of debt and part inflation of the currency - is the aim, one could postulate a situation where the US debt mountain has deflated to say $35 trillion and that the massive new funding required to instil confidence in the system produces a five-fold increase in money and prices. In this situation, nominal GDP would have increased from $14 trillion to $70 trillion. Real GDP will remain unchanged, it is just the purchasing power of the currency that will have been reduced by 80%.
A $35 trillion debt level is manageable with a GDP of $70 trillion.
This seems to be the best "middle road" route that we can hope for. Much will depend on how our politicians and central bankers handle the situation. There is still plenty of scope for the situation to get out of hand at either extreme, resulting in either a deflationary depression or a hyperinflation.
In conclusion, I would like to discuss how the world got into this situation. We have been bombarded by views that it was caused by Greenspan's excessive liquidity and low interest rates, combined with weakness in regulation, rating agency mistakes and obfuscation from Wall Street. Even the OTC derivatives have been blamed for part of the problem.
These issues are all valid but to use a medical analogy, they are secondary cancers. They could not have existed without a primary cancer being the underlying cause and stimulus. So what was the primary cancer, the one which made it possible for all the other problems to exist?
We need to go back to basics. This subject was dealt with in the article "Chaos Chronicled."
This article explains how the fractional reserve banking system works.
Briefly, the fractional reserve system requires approximately 10% of new deposits to be lodged with the Federal Reserve or Central Bank. Thus if a new deposit of say $1.0m of fresh money arrives in the banking system, the bank receiving the deposit must put $100,000 with the central bank and can loan the balance of $900,000. When that loan arrives as a deposit with another bank, $90,000 must be placed with the central bank and $810,000 can be loaned out. That in turn will arrive as a deposit elsewhere and $81,000 must be placed with the central bank and $729,000 can be loaned out, and so on. Finally when all these iterations are complete, the central bank ends up with $1.0m as deposits from the banks that have made loans of about $9.0m.
At this point new loans can only be made from profits generated within the economy. This is important as the banking system will have reached a period of stability which will remain until a fresh deposit of newly created money appears in the system from somewhere. That new money will allow the banking system to generate loans of approximately 9 times the amount of new money.
What happens if there is a money tap open somewhere in the system and each day a large dollop of newly created money enters the system? Very soon the banks will be awash with deposits and desperately seeking new secure loans.
As lions kill instinctively in order to survive, bankers make loans instinctively in order to survive. Eventually in these circumstances of excess deposits, lending standards deteriorate and new loans are made to less credit worthy borrowers. In time, anyone with a good story gets a loan.
It is this desperate search for secure new loans by the banking systems of the world that is the primary cancer referred to earlier in the medical analogy. It allowed Wall Street to develop racy new products which were gobbled up by banks around the world in the belief that they were secure investments.
This is what actually happened in the real world. There was an open tap pouring large dollops of newly created money into the world banking systems over many years that created the insatiable appetite for new banking loans and investments.
What is important to understand is that without this insatiable demand for secure loans and investment by banks, it would not have been possible for all the other irregularities to have taken place. Credit standards would have remained robust and the banks would have avoided the bulk of the toxic waste that they got involved with.
What was the money tap that was left running? It is a flaw in the international monetary system which allows the USA to pay for its trade deficit using newly created US Dollars. This has been going on for two decades but has mushroomed in recent years. Ten years ago, the US trade deficit was of the order of $100 billion per annum. This number grew steadily until a couple of years ago it was running at $800 billion per annum. An injection of $800 billion into the world's banking system could accommodate new loans of nine times that amount, or $7.2 trillion in a single year!
Recently the US trade deficit has been averaging $700 billion per annum, allowing new loans of the order of $6.3 trillion per annum to possibly be created. These numbers are in addition to other sources of new money which individual countries injected into their local monetary systems to stimulate their economies.
The simple fact is that the world's banks were awash with deposits looking for anything that resembled a reasonable loan or investment. Wall Street created the products required to meet that demand, resulting in the huge debt bubble that recently came to an end. In addition, banks (prompted by the large availability of new deposits) made many unwise loans across national borders which are now creating problems in countries in Eastern Europe and South America.
The problems are manifold, but the most pressing one is to restore confidence in the banking systems of the world. Failure to do so will measurably increase the odds of a deflationary depression. The power of the modern electronic money creating machine suggests that the odds still favour an inflationary outcome, hopefully of the category 3 type referred to earlier.
13 November, 2008
Alf Field
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| Bloomberg news: Mexico to Seek Prison for Currency Speculators, Universal Says |
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| Something to celebrate, sort of |
PETER BRIMELOW
Something to celebrate, sort of
Commentary: Dow Theory's Schannep turns bullish, calls end of bear market
Schannep has been signaling this call for some time. He has a highly individual interpretation of the Dow Theory, explained in his new book, "Dow Theory for the 21st Century." See related column. But his actions now seem to be based on his proprietary technical indicators. He writes in explanation:
"That is what I will be doing in the model portfolio in accordance with the 'rules' of the Schannep Timing Indicator and our Composite Indicator. The last time we had such a signal was on October 9th, 2002, the start of that 5 year bull market."
Schannep's record (for the record) is looking better and better. Over the year to date, TheDowTheory.com is up 1.9% by Hulbert Financial Digest count, vs. negative 18.6% for the dividend-reinvested Dow Jones Wilshire 5000
This makes it one of only 13 letters out of some 180 followed by HFD to be in the black this year. Over the past five years, the letter has achieved a 7.31% annualized gain, vs. 6% annualized for the total return DJ Wilshire 5000.
There. Feel better now?
Schannep's switch emboldened me to look at Richard Russell's Dow Theory Letters. The octogenarian Russell has been ill recently and has just admitted sadly that he missed the great break that began last summer. (See Sept. 19 column). But his long-run HFD record is so strong that his views have to be respected. See related column.
Russell sees clearly how this will end:
"This is real bear market action such as we've not seen since 1973-74. I expect this downtrend to end with an all-out panic-type crash. That would clear the air and serve to reduce the huge inventory of stock for sale. When the store of 'stock for sale' is emptied out, we will be close to the time when the institutional bargain hunters are ready to re-enter the market. That action will be characterized by a 90% up-day."
But he derides the idea that Dow Theory or anything else suggest a bottom can be called at this point: "Bear declines end in only one way -- in exhaustion."
After Tuesday's close, Russell wrote: "Today's decline was dreadful and atypical action...The stock market appears to be in full panic mode." But apparently still not enough to justify calling a bottom: Russell even speculates that the market may test the 2002 low Dow low of 7,286.
Oh well. Back to the cheerful, -- sort of. Peter Eliades' Stock Market Cycles is now the HFD top performer over the year to date, up 17.8%. Eliades was up 4.3% in September alone, vs. negative 9.3% for the total-return DJW. See related column.
In the last email bulletin available at press time, sent out on Friday night, Eliades wrote:
"Orthodox technical analysis would be looking for the possibility of a market low at current levels. And yet... and yet... with the exception of [one of his proprietary indictors] there is just no indication from the Trading Index moving averages that the market is forming a bottom of any importance."
Eliades says his work suggests, tentatively, a low of 8,000-8,600 on the Dow.
http://www.marketwatch.com/news/story/dow-theory-editor-turns-bullish/story.aspx?guid=%7B1DA1B28C%2D8D5C%2D4381%2DA112%2D2F3414054AF9%7D
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| Impending Capitulation signals for the Dow and S&P |
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| Bloomberg: AIG May Get $37.8 Billion From Fed for More Liquidity |
Bloomberg: AIG May Get $37.8 Billion From Fed for More Liquidity
"The collapse of the New York-based insurer was the subject of Congressional hearings yesterday, which triggered criticism of the company for spending $440,000 on a California conference at a beachside resort less than a week after AIG was rescued."
CRAIG: The Fed should only consider such a request AFTER all the AIG jerks who attended the $440,000 beachside resort conference are fired with no severance. Also, any Fed or Treasury employees who attended this outrageous expenditure should be forced to resign.
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| Berkshire Put Out by the Market's Plunge |
WEEKDAY TRADER EXTRA
Berkshire Put Out by the Market's Plunge
By ANDREW BARY
Buffett's sales of put options weigh on near-term earnings, but should pay off in the long run.
WARREN BUFFETT PRESCIENTLY HAS WARNED about the dangers of financial derivatives, calling them "financial weapons of mass destruction." Indeed, he noted in a recent interview that American International Group (ticker: AIG) "would be doing fine today if it had never heard of the word 'derivative'."
Buffett's Berkshire Hathaway has some sizable equity derivatives positions of its own and the master investor may wish that his company had avoided them because they likely produced a sizable loss in the third quarter.
Berkshire has written -- or sold -- long-dated puts on about $40 billion of equity indexes, including the Standard & Poor's 500 and three foreign indexes. A put sale is a bullish bet because the seller stands ready to buy an index at a fixed price. If markets fall, puts rise in value, hurting sellers of those options.
During the third quarter, the S&P 500 fell about 9%, and importantly, market volatility increased sharply. Both these factors increased the value of puts, including those sold by Berkshire.
The company doesn't disclose enough about its put holdings to determine the market impact on their value in the third quarter. But Barron's estimates that the put position could show a loss of as much as $2 billion in third quarter, which will affect Berkshire's reported earnings expected to be released in early November.
Berkshire disclosed the put position in its 2007 annual report and Buffett discussed it in his annual letter. The good news for Berkshire is that as long as the company maintains a high credit rating, it doesn't have to post collateral when the put positions go against it. The puts are long dated and mature between 2019 and 2027. Berkshire has no counterparty risk because it holds the money.
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Buffett said in his annual letter that the puts could cause earnings volatility, but added that he and Berkshire vice chairman Charlie Munger "will not be bothered by these swings–even though they could easily amount to $1 billion or more in a quarter–and we hope you won't be either."
Ultimately, Berkshire is likely to profit on the puts because they're apt to expire worthless, assuming markets recover in the next 11-to-19 years, which is a pretty fair bet notwithstanding the current plunge in stocks. Berkshire will then pocket the puts' premiums of almost $5 billion plus investment income on that money.
As of now, the puts are under water, perhaps to the tune of $3 billion. Arguably, Buffett was too early. If he had sold the puts recently, he would have generated enormous premiums because of high market volatility. One volatility measure involving the S&P 500, the so-called VIX index, has doubled since June 30 to over 50%.
Berkshire also has made bullish derivative bets on the junk-bond market, involving so-called credit default swaps on $8.8 billion of high-yield debt, which means the company would have to pay off if a group of junk bonds defaults. Those swaps, carried at $2.2 billion, may have declined in value by several hundred million dollars in the third quarter due to the setback in the junk market. Berkshire didn't have an immediate comment.
As a result of the equity and junk derivative investments, Berkshire's reported earnings for the third quarter are apt to be depressed.
Berkshire's giant equity portfolio, however, is holding up well during the market downturn. Through today, Berkshire's largest equity investments -- including American Express (AXP), Coca-Cola (KO) and Wells Fargo (WFC) -- are down an estimated 12% year to date, versus a 29% drop in the S&P 500.
Berkshire has been helped by holdings like Wells, Johnson & Johnson (JNJ), Kraft (KFT) and Wal-Mart Stores (WMT) that have either held their own this year or in the case of Wal-Mart gained about 25%. American Express (AXP) is a notable loser with a year-to-date loss of over 40%. Berkshire's equity investments totaled $69 billion on June 30.
Berkshire's class A (BRK-A) shares are down $6,900 to $131,600 Monday afternoon and off 7% this year. The stock has held up well lately as investors see the cash-rich Berkshire as a safe haven and as Buffett makes seemingly attractive, high-yielding investments in companies like General Electric (GE) and Goldman Sachs (GS.)
Comments? E-mail us at online.editors@barrons.com
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| Next: The Mother Of All Bank Runs? |
Next: The Mother Of All Bank Runs? Nouriel Roubini 10.02.08, 12:01 AM ET
It's plain that the current financial crisis is worsening in spite of--or perhaps because of--the Treasury rescue plan.
The strains in financial markets are becoming more, rather than less, severe in spite of the nuclear option of a $700 billion package: Interbank spreads are widening and are at a level never seen before; credit spreads are widening to new peaks; short-term Treasury yields are going back to near-zero levels as there is flight to safety; credit default swap (CDS) spreads for financial institutions are rising to extreme levels as the ban on shorting of financial stock has moved the pressures on financial firms to the CDS market; and stock markets around the world have reacted very negatively to this rescue package.
Financial institutions in the U.S. and in advanced economies are going bust. In the U.S., the latest victims were Washington Mutual (the largest U.S. savings and loan) and Wachovia (the sixth largest U.S. bank). In the U.K., after Northern Rock and the acquisition of HBOS by Lloyds TSB, you now have the bust and rescue of Bradford & Bingley; in Belgium you had Fortis going bust and being rescued over the weekend; in Germany, Hypo Real Estate, a major financial institution near bust, has also needed rescue.
So, this is not just a U.S. financial crisis. It is a global crisis hitting institutions in the U.K., the Euro-zone and other advanced economies (Iceland, Australia, New Zealand, Canada etc.).
The strains in financial markets--especially short-term interbank markets--are becoming more severe in spite of the Fed and other central banks having injected $300 billion of liquidity in the financial system last week alone, including massive liquidity lending to Morgan Stanley and Goldman Sachs.
In a solvency and credit crisis that goes well beyond illiquidity, no one is lending to counter-parties as no one trusts any counter-party (even the safest ones), and everyone is hoarding the liquidity that is injected by central banks. And since this liquidity goes only to banks and major broker-dealers, the rest of the shadow banking system has no access to this liquidity as the credit transmission mechanisms are blocked.
After the bust of Bear and Lehman, and the merger of Merrill with Bank of America, I suggested that Morgan Stanley and Goldman Sachs should also merge with a large financial institution that has a large base of insured deposits so as to avoid a run on their overnight liabilities. Instead, Morgan and Goldman took a cosmetic approach, converting themselves into bank holding companies as a way to get further liquidity support--and regulation as banks--from the Fed and as a way to acquire safe deposits.
But neither institution can create, in a short time, a franchise of branches, and neither one has the time and resources to acquire smaller banks. And the injection of $8 billion of Japanese capital into Morgan and $5 billion of capital from Warren Buffett into Goldman is a drop in the ocean, as both institutions need much more capital.
Thus, the gambit of converting into banks while not being banks yet hasn't worked, and the run against them has accelerated in the last week: Morgan's CDS spread went through the roof on Friday to over 1200, and the firm has already lost over a third of its hedge-fund clients together with the highly profitable prime brokering business (this is really a kiss of death for Morgan). And the coming roll-off of the interbank lines to Morgan would seal its collapse. Even Goldman Sachs is under severe stress: Most of its lines of business (including trading) are now losing money.
Both institutions should stop playing for time, as delay will be destructive: They should merge now with a large foreign financial institution, as no U.S. institution is sound enough and large enough to be a solid merger partner. If John Mack and Lloyd Blankfein don't want to end up like Richard Fuld, they should do a John Thain today and merge as fast as they can with other large commercial banks. Maybe Mitsubishi and a bunch of Japanese life insurers can take over Morgan.
The only institution sound enough to swallow Goldman may be HSBC. Or maybe Nomura in Japan should make a bid for Goldman. Either way, Mack and Blankfein should sell at a major discount before they end up like Bear and are offered, in a few weeks, only a couple of bucks a share for their faltering operation. And the Fed and Treasury should tell them to hurry up, as they are both much bigger than Bear or Lehman, and their collapse would have severe systemic effects.
When investors don't trust even venerable institutions like Morgan Stanley and Goldman Sachs, you know that the financial crisis is as severe as ever. When a nuclear option of a monster $700 billion rescue plan is not even able to rally stock markets, you know this is a global crisis of confidence in the financial system.
The next step of this panic could be the mother of all bank runs, i.e. a run on the trillion dollar-plus of the cross-border short-term interbank liabilities of the U.S. banking and financial system, as foreign banks start to worry about the safety of their liquid exposures to U.S. financial institutions. A silent cross-border bank run has already started, as foreign banks are worried about the solvency of U.S. banks and are starting to reduce their exposure. And if this run accelerates--as it may now--a total meltdown of the U.S. financial system could occur.
The U.S. and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 basis points reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.
Nouriel Roubini, a professor at the Stern Business School at NYU and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
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| It Ain't Gonna Work |
It Ain't Gonna Work
Tim Wood
By every historical measure the equity markets slipped into a secular bear market in 2000. As a result, we began to see efforts by the powers that be to keep the market afloat. I have stated all along that manipulation, will ultimately not work. I have also stated all along that all this will do is make matters worse in the end. Well, I would think that everyone can now see, matters are indeed much worse. Yet, the Fed, the Treasury and the politicians continue to think that they can “fix” the problem by throwing more money at it. They do not understand that they can’t “fix” this economic crisis. They also do not understand that it is their trying to “fix” things in the past that has created the current situation. All markets as well as the economy must both inhale and exhale. They are trying to prevent the exhaling and it ain’t gonna work.
What we are dealing with is the wrath of Kondratieff Winter, which is about the purging of excess credit. Along with that comes deflation and along with that global stock markets enter into extended declines. Real estate declines, economic growth slows, commodities decline, bankruptcies accelerate as the excess credit is purged from the system, the banking system is shaken, the free market is blamed and we move toward national fascist political tendencies. We are now seeing each and every one of these symptoms of K-wave winter. For the record, I did not make up these symptoms to fit the current situation. I have original writings by Nikolai D. Kondratieff and the signs of K-wave winter were quoted from a book by David Knox Barker titled, The K-wave and was published in 1995. Don’t think the powers that be aren’t aware of Kondratieff Winter. They know full well what we are facing and that is why they have tried to hold back its wrath as diligently as they have, since 2001.
Now, from a Dow theory perspective, I have been saying that when the averages moved below their August 2007 secondary low points, on November 21, 2007, that under classical Dow theory a primary bearish trend change occurred. According to William Peter Hamilton, the great Dow theorist of the 1920’s who called the 1929 top, said that when the averages move below their previous secondary low points the stock market barometer is forecasting stormy conditions. Interestingly enough, most major averages around the world also topped and entered into primary bearish trends in conjunction with this Dow theory primary trend change.
Let’s now move to the Dow theory chart below. When the non-confirmation between the averages occurred in July, many insisted that that non-confirmation was bullish. I even read articles claiming that the primary trend was bullish in accordance to Dow theory. I have maintained that under orthodox Dow theory nothing has changed the primary bearish trend that was confirmed on November 21, 2007 and that the non-confirmation was merely a warning of a possible trend change, but that it was NOT in and of itself bullish. This has since proven correct. This topic was also addressed here in mid-September. There are many that view the Dow theory as some antiquated relic of the past that is no longer relevant. There are others that claim to be Dow theorists, yet they have never read the writings of our Dow theory founding fathers, which again were Charles H. Dow, William Peter Hamilton and Robert Rhea. Anyway, I guess my point here is that the Dow theory first signaled stormy conditions last November and it has proven correct once again. It has also helped me to guide my subscribers through this economic disaster and it is anything but an antiquated relic of the past. If someone says this, then they don’t truly understand Dow theory.
The great Dow theorists of the past also wrote about manipulation. The following text on this topic is by Robert Rhea:
“Manipulation is possible in the day to day movement of the averages, and secondary reactions are subject to such an influence to a more limited degree, but, the primary trend can never be manipulated.
Hamilton frequently discussed the subject of stock market manipulation. There are many who will disagree with his belief that manipulation is a negligible factor in primary movements, but it should always be remembered that he had, as a background for his opinions, a most intimate acquaintance with the veterans of Wall Street, and the advantage of having spent his life in accumulating facts pertaining to financial matters.
The following comment, taken at random from his many editorials, affords convincing proof that his views on the subject of manipulation did not vary:
‘A limited number of stocks may be manipulated at one time, and may give an entirely false view of the situation. It is impossible, however, to manipulate the whole list so that the average price of 20 active stocks will show changes sufficiently important to draw market deductions from them.’ (Nov. 29, 1908)
‘Anybody will admit that while manipulation is possible in the day-to-day market movement, and the short swing is subject to such an influence in a more limited degree, the great market movement must be beyond the manipulation of the combined financial interests of the world.’ (Feb.26, 1909)
‘…the market itself is bigger than all the ‘pools’ and ‘insiders’ put together.’ (May 8, 1922)
‘One of the greatest of misconceptions, that which has militated most against the usefulness of the stock market barometer, is the belief that manipulation can falsify stock market movements otherwise authoritative and instructive. The writer claims no more authority than may come from twenty-two years of stark intimacy with Wall Street, preceded by practical acquaintance with the London Stock Exchange, the Paris Bourse and even that wildly speculative market in gold shares, ‘Between the Chains,’ in Johannesburg in 1895. But in all that experience, for what it may be worth, it is impossible to recall a single instance of a major market movement which depended for its impetus, or even for its genesis, upon manipulation. These discussions have been made in vain if they have failed to show that all the primary bull markets and every primary bear market have been vindicated, in the course of their development and before their close, by the facts of general business, however much over-speculations or over-liquidation may have tended to excess, as they always do, in the last stage of the primary swing.’ (The Stock Market Barometer) ‘…no power, not the U. S. Treasury and the Federal Reserve System combined, could usefully manipulate forty active stocks or deflect their record to any but a negligible extent.’ (April 27, 1923)
‘The average amateur trader believes the stock market is guided in its trends by a certain mysterious ‘power,’ this belief being the one factor, next to impatience, most responsible for his losses. He reads tipster sheets avidly; he scans the newspapers industriously for news likely, in his opinion, to change the trend of the market. He does not seem to realize that by the time the news of real importance is printed, its effect, so far as the basic trend of the market is concerned, has long ago been discounted.’
‘It is true that a flurry in the price of wheat or cotton may influence the day to day movement of stock prices. Moreover, sometimes newspaper headlines contain news which is construed as bullish or bearish by market dabblers, who collectively rush in to buy or sell, thus influencing or ‘manipulating’ the market for a short period. The professional speculator is always ready to help the movement along by ‘placing his line’ while the little fellow timidly ‘lays out’ a few shares; then, when the little fellow decides to increase his commitments, the professional begins to unload and the reaction ends, and the primary movement is again resumed. It is doubtful if many of these reactions would ever be caused by newspaper headlines alone unless the market was either overbought or oversold at the time---the ‘technical situation’ so dear to the hearts of financial news reporters.’
‘Those who believe the primary trend can be manipulated could, no doubt, study the subject for a few days and be convinced that such a thing is impossible. For instance, on September 1, 1929, the total market value of all stocks listed on the New York Stock Exchange was reported to have amounted to more than $89,000,000,000. Imagine the money which would have been involved in depressing such a mass of values even 10 per cent!’
Yes, it is true that this is not the early 1900’s. We also know that today the Fed has more tools available to influence the market as well. But, at the same time the markets are much, much larger than they were in the early 1900’s. So, even though the Fed has more tools available, this fact is over ridden by the fact that the market is now many, many times larger than it was then. Personally, I think that the powers that be helped to make matters worse by postponing the inevitable and that they are now facing checkmate because the die has now been pretty much cast.
October 4, 2008
I have begun doing free Friday market commentary that is available at www.cyclesman.info/Articles.htm so please begin joining me there. Should you be interested in more in depth analysis that provides intermediate-term turn points utilizing the Cycle Turn Indicator, which has done a fabulous job, on stock market, the dollar, bonds, gold, silver, oil, gasoline, and more, those details are available in the monthly research letter and short-term updates. We have called every turn in commodities, the dollar and the stock market. I will be covering the details as to what’s next with the stock market, the dollar and commodities in the October research letter. Don’t be fooled by the hype. A subscription includes access to the monthly issues of Cycles News & Views covering the Dow theory, and very detailed statistical based analysis plus updates 3 times a week.
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| THE AUSTRIAN SCHOOL AND THE MELTDOWN |
THE AUSTRIAN SCHOOL AND THE MELTDOWN
by Dr. Ron Paul
The financial meltdown the economists of the Austrian School predicted has arrived.
We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve. No liquidation of bad debt and malinvestment is to be allowed. By doing more of the same, we will only continue and intensify the distortions in our economy – all the capital misallocation, all the malinvestment – and prevent the market’s attempt to re-establish rational pricing of houses and other assets.
[On September 25] the president addressed the nation about the financial crisis. There is no point in going through his remarks line by line, since I’d only be repeating what I’ve been saying over and over – not just for the past several days, but for years and even decades.
Still, at least a few observations are necessary.
The president assures us that his administration “is working with Congress to address the root cause behind much of the instability in our markets.” Care to take a guess at whether the Federal Reserve and its money creation spree were even mentioned?
We are told that “low interest rates” led to excessive borrowing, but we are not told how these low interest rates came about. They were a deliberate policy of the Federal Reserve. As always, artificially low interest rates distort the market. Entrepreneurs engage in malinvestments – investments that do not make sense in light of current resource availability, that occur in more temporally remote stages of the capital structure than the pattern of consumer demand can support, and that would not have been made at all if the interest rate had been permitted to tell the truth instead of being toyed with by the Fed.
Not a word about any of that, of course, because Americans might then discover how the great wise men in Washington caused this great debacle. Better to keep scapegoating the mortgage industry or “wildcat capitalism” (as if we actually have a pure free market!).
Speaking about Fannie Mae and Freddie Mac, the president said: “Because these companies were chartered by Congress, many believed they were guaranteed by the federal government. This allowed them to borrow enormous sums of money, fuel the market for questionable investments, and put our financial system at risk.”
Doesn’t that prove the foolishness of chartering Fannie and Freddie in the first place? Doesn’t that suggest that maybe, just maybe, government may have contributed to this mess? And of course, by bailing out Fannie and Freddie, hasn’t the federal government shown that the “many” who “believed they were guaranteed by the federal government” were in fact correct?
Then come the scare tactics. If we don’t give dictatorial powers to the Treasury Secretary “the stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet.” Left unsaid, naturally, is that with the bailout and all the money and credit that must be produced out of thin air to fund it, the value of your retirement account will drop anyway, because the value of the dollar will suffer a precipitous decline. As for home prices, they are obviously much too high, and supply and demand cannot equilibrate if government insists on propping them up.
It’s the same destructive strategy that government tried during the Great Depression: prop up prices at all costs. The Depression went on for over a decade. On the other hand, when liquidation was allowed to occur in the equally devastating downturn of 1921, the economy recovered within less than a year.
The president also tells us that Senators McCain and Obama will join him at the White House today in order to figure out how to get the bipartisan bailout passed. The two senators would do their country much more good if they stayed on the campaign trail debating who the bigger celebrity is, or whatever it is that occupies their attention these days.
F.A. Hayek won the Nobel Prize for showing how central banks’ manipulation of interest rates creates the boom-bust cycle with which we are sadly familiar. In 1932, in the depths of the Great Depression, he described the foolish policies being pursued in his day – and which are being proposed, just as destructively, in our own:
Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion.
To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection – a procedure that can only lead to a much more severe crisis as soon as the credit expansion comes to an end... It is probably to this experiment, together with the attempts to prevent liquidation once the crisis had come, that we owe the exceptional severity and duration of the depression.
The only thing we learn from history, I am afraid, is that we do not learn from history.
The very people who have spent the past several years assuring us that the economy is fundamentally sound, and who themselves foolishly cheered the extension of all these novel kinds of mortgages, are the ones who now claim to be the experts who will restore prosperity! Just how spectacularly wrong, how utterly without a clue, does someone have to be before his expert status is called into question?
Oh, and did you notice that the bailout is now being called a “rescue plan”? I guess “bailout” wasn’t sitting too well with the American people.
The very people who with somber faces tell us of their deep concern for the spread of democracy around the world are the ones most insistent on forcing a bill through Congress that the American people overwhelmingly oppose. The very fact that some of you seem to think you’re supposed to have a voice in all this actually seems to annoy them.
I continue to urge you to contact your representatives and give them a piece of your mind. I myself am doing everything I can to promote the correct point of view on the crisis. Be sure also to educate yourselves on these subjects – the Campaign for Liberty blog is an excellent place to start. Read the posts, ask questions in the comment section, and learn.
H.G. Wells once said that civilization was in a race between education and catastrophe. Let us learn the truth and spread it as far and wide as our circumstances allow. For the truth is the greatest weapon we have.
In liberty,
Ron Paul
for The Daily Reckoning
Editor’s Note: Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency.
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| Bloomberg: Cash-Starved Companies Scrap Dividends, Tap Credit to Survive |
``If businesses don't have access to capital, smaller companies in particular, they might get wiped out,'' said Alec Young, a New York-based equity strategist at Standard & Poor's. ``It's impossible to quantify how expensive this crisis is going to be for Corporate America; there's unlimited downside.''
CRAIG: The current bailout plan is deeply flawed will not provide the liquidity needed to help businesses especially small businesses which are most vulnerable to having their A/R's stretched out. After the current RTC-styled bailout passes corporate America will be demanding a Reconstruction Finance Corporation (RFC) solution.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aa28qIGme_R8&refer=home
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| Lula blames rich nations for crisis -Al Jazeera English - Americas |
"Luiz Inacio Lula da Silva [President of Brazil] said rich countries "need to take responsibility" because growing economies that "have done everything to have good fiscal policy ... can't be turned into victims of the casino erected by the American economy."
CRAIG: Much of what Lula says is true. At the same time Brazil and other commodity countries have greatly benefitted from the surge in commodities which have been used in products that have ultimately been sold to American consumers.
http://english.aljazeera.net/news/americas/2008/09/200893006218621.html
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| Bloomberg: Money-Market Rates Climb After U.S. Congress Rejects Bailout |
``The money markets have completely broken down, with no trading taking place at all,'' said Christoph Rieger, a fixed- income strategist at Dresdner Kleinwort in Frankfurt. ``There is no market any more. Central banks are the only providers of cash to the market, no-one else is lending.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=adMzMh3b2Ew8&refer=home
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| The Rich Are Staging a Coup This Morning ...a message from Michael Moore |
The Rich Are Staging a Coup This Morning ...a message from Michael Moore
Let me cut to the chase. The biggest robbery in the history of this country is taking place as you read this. Though no guns are being used, 300 million hostages are being taken. Make no mistake about it: After stealing a half trillion dollars to line the pockets of their war-profiteering backers for the past five years, after lining the pockets of their fellow oilmen to the tune of over a hundred billion dollars in just the last two years, Bush and his cronies -- who must soon vacate the White House -- are looting the U.S. Treasury of every dollar they can grab. They are swiping as much of the silverware as they can on their way out the door.
No matter what they say, no matter how many scare words they use, they are up to their old tricks of creating fear and confusion in order to make and keep themselves and the upper one percent filthy rich. Just read the first four paragraphs of the lead story in last Monday's New York Times and you can see what the real deal is:
"Even as policy makers worked on details of a $700 billion bailout of the financial industry, Wall Street began looking for ways to profit from it.
"Financial firms were lobbying to have all manner of troubled investments covered, not just those related to mortgages.
"At the same time, investment firms were jockeying to oversee all the assets that Treasury plans to take off the books of financial institutions, a role that could earn them hundreds of millions of dollars a year in fees.
"Nobody wants to be left out of Treasury's proposal to buy up bad assets of financial institutions."
Unbelievable. Wall Street and its backers created this mess and now they are going to clean up like bandits. Even Rudy Giuliani is lobbying for his firm to be hired (and paid) to "consult" in the bailout.
The problem is, nobody truly knows what this "collapse" is all about. Even Treasury Secretary Paulson admitted he doesn't know the exact amount that is needed (he just picked the $700 billion number out of his head!). The head of the congressional budget office said he can't figure it out nor can he explain it to anyone.
And yet, they are screeching about how the end is near! Panic! Recession! The Great Depression! Y2K! Bird flu! Killer bees! We must pass the bailout bill today!! The sky is falling! The sky is falling!
Falling for whom? NOTHING in this "bailout" package will lower the price of the gas you have to put in your car to get to work. NOTHING in this bill will protect you from losing your home. NOTHING in this bill will give you health insurance.
Health insurance? Mike, why are you bringing this up? What's this got to do with the Wall Street collapse?
It has everything to do with it. This so-called "collapse" was triggered by the massive defaulting and foreclosures going on with people's home mortgages. Do you know why so many Americans are losing their homes? To hear the Republicans describe it, it's because too many working class idiots were given mortgages that they really couldn't afford. Here's the truth: The number one cause of people declaring bankruptcy is because of medical bills. Let me state this simply: If we had had universal health coverage, this mortgage "crisis" may never have happened.
This bailout's mission is to protect the obscene amount of wealth that has been accumulated in the last eight years. It's to protect the top shareholders who own and control corporate America. It's to make sure their yachts and mansions and "way of life" go uninterrupted while the rest of America suffers and struggles to pay the bills. Let the rich suffer for once. Let them pay for the bailout. We are spending 400 million dollars a day on the war in Iraq. Let them end the war immediately and save us all another half-trillion dollars!
I have to stop writing this and you have to stop reading it. They are staging a financial coup this morning in our country. They are hoping Congress will act fast before they stop to think, before we have a chance to stop them ourselves. So stop reading this and do something -- NOW! Here's what you can do immediately:
1. Call or e-mail Senator Obama. Tell him he does not need to be sitting there trying to help prop up Bush and Cheney and the mess they've made. Tell him we know he has the smarts to slow this thing down and figure out what's the best route to take. Tell him the rich have to pay for whatever help is offered. Use the leverage we have now to insist on a moratorium on home foreclosures, to insist on a move to universal health coverage, and tell him that we the people need to be in charge of the economic decisions that affect our lives, not the barons of Wall Street.
2. Take to the streets. Participate in one of the hundreds of quickly-called demonstrations that are taking place all over the country (especially those near Wall Street and DC).
3. Call your Representative in Congress and your Senators. (click here to find their phone numbers). Tell them what you told Senator Obama.
When you screw up in life, there is hell to pay. Each and every one of you reading this knows that basic lesson and has paid the consequences of your actions at some point. In this great democracy, we cannot let there be one set of rules for the vast majority of hard-working citizens, and another set of rules for the elite, who, when they screw up, are handed one more gift on a silver platter. No more! Not again!
Yours,
Michael Moore
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| Time is running out - Ron Paul |
Wednesday, September 24, 2008
Dear Friends,
Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.
The events of the past week are no exception.
The bailout package that is about to be rammed down Congress' throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! "This is welfare for the rich," he said. "This is socialism for the rich. It's bailing out the financiers, the banks, the Wall Streeters."
That describes the current bailout package to a T. And we're being told it's unavoidable.
The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!
• The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.
• Financial institutions are "designated as financial agents of the Government." This is the New Deal to end all New Deals.
• Then there's this: "Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.
There goes your country.
Even some so-called free-market economists are calling all this "sadly necessary." Sad, yes. Necessary? Don't make me laugh.
> Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we're supposedly presented with this November: yes or yes. Now, with a backlash brewing, they're not quite sure what their views are. A sad display, really.
Although the present bailout package is almost certainly not the end of the political atrocities we'll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.
The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?
When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?
Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.
In liberty,
Ron Paul
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| Worst of Crisis Ahead |
The worst of the financial crisis may still lie ahead and more major financial institutions may face trouble in coming months, IMF director general Dominique Strauss-Kahn said on Wednesday.
The crisis risks weighing on the world economy, he said, though both developing and developed countries were showing signs of resilience, Strauss-Kahn told reporters after a meeting with Gulf Arab finance ministers and central bank governors.
"It is a very serious financial crisis," he said. "The consequences for some financial institutions are still in front of us. We have to expect that there may be in the coming weeks and coming months other financial institutions with some problems," he said.
Strauss-Kahn spoke the day after U.S. authorities engineered an $85 billion rescue American International Group [AIG 3.75 -1.01 (-21.22%) ] , staving off bankruptcy for the insurance giant and bringing a measure of calm to shell-shocked global markets.
"What we are experiencing these days is an increase in the downside risk and uncertainty, but we still believe that the world economy will recover in 2009," Strauss-Kahn said. "What is important to see is that it has an influence on the real economy but that the real economy is very resilient both in developed and emerging countries."
The AIG bailout came just two days after U.S. authorities refused to rescue investment bank Lehman Brothers [LEH 0.30 0.09&nbs p; (+42.86%) ] , forcing it into bankruptcy protection despite pleas from Wall Street's chiefs.
The Fed stepped in amid worries that a collapse of AIG could cause far-reaching damage to the global financial system, although some market players argued that the government's move brings just a short-term respite and could do long-term harm.
http://www.cnbc.com/id/26752681
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| Banks Can Now Use Deposits to Fund Investment Banking Operations? - Naked capitalism: |
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| U.S. Aug. industrial output plunges 1.1% - MarketWatch |
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| Bloomberg: Lehman May Shift $32 Billion of Mortgage Assets to `Bad Bank' - DELUSIONAL TALK |
Bloomberg: Lehman May Shift $32 Billion of Mortgage Assets to `Bad Bank' - DELUSIONAL TALK
All the chatter in this article is completely and utterly delusional and is like seeing a fish thrashing madly around on a deck before death. Lehman has no/little business lines that are profitable so what would be put into the "Good Bank"? Likewise getting debt financing for the "Bad Bank" which is dependent on a recovery in the commercial real estate market is so absurd. Since consumers have exhausted their spending power, retail (save Wal-Mart, Costco, etc.) is dead and vacancies will soon climb to record levels as retailers go bust.
Bill Gross is warning people about a financial tsunami while Bernanke and Paulson sit on their hands and do NOTHING. Problems in residential real estate will not be solved until the mortgage markets are stabilized. Where is Paulson's plan for F&F? Why are the markets being put into turmoil over Lehman when Bernanke must ultimately arrange a bailout?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aQjsXBJ4uN1Y&refer=home
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| 2 Wall St. brokers accused of $1B subprime fraud |
2 Wall St. brokers accused of $1B subprime fraud
By TOM HAYS
,
AP
NEW YORK -A former Wall Street broker pleaded not guilty Wednesday to charges he and a colleague duped investors into purchasing more than $1 billion in high-risk securities by making it look as though the trades were protected by the federal government.
An indictment unsealed in federal court in Brooklyn said because the securities actually were tied to subprime mortgages, Eric Butler and Julian Tzolov stood to pocket higher commissions. The scheme was exposed when the subprime market collapsed.
"The defendants' fraudulent misrepresentations and bait-and-switch tactics saddled investors with unknown risks they did not bargain for," U.S. Attorney Benton Campbell said in announcing the case against the former Credit Suisse Securities brokers.
Butler, 36, was released on $2.5 million bond following his arraignment on securities fraud, wire fraud and conspiracy charges. The Bulgarian-born Tzolov, 35, was out of the country but expected to return and surrender on the same charges.
If convicted, each faces up to 20 years in prison and a $5 million fine.
Defense attorney Paul Weinstein said Butler would fight the charges. He called his client "an excellent broker" who "believed he was doing the best for his clients."
Tzolov's attorney, Kenneth Breen, declined comment.
Credit Suisse said the two resigned last September "after we detected their prohibited activity and promptly suspended them."
The New York investment firm said it immediately informed the Securities and Exchange Commission of their activities and has continued to assist the agency in its investigation.
The indictment and a related SEC civil lawsuit alleged that Butler and Tzolov led corporate customers to believe that auction rate securities being purchased in their accounts were backed by federally guaranteed student loans and were safe like cash.
In reality, the securities were backed by subprime mortgages, collateralized debt obligations and other high-risk investments, the authorities said. Because of their higher risk, they brought a higher yield and much larger commissions for the brokers.
The authorities said Tzolov and Butler deceived foreign corporate customers by sending them e-mail confirmations in which the terms "St. Loan" or "Education" were added to names of other types of securities purchased for the customers.
The two brokers also frequently deleted references in the e-mails to "CDO," for collateralized debt obligations, or "mortgage" from the names of the securities purchased, the agency said. CDOs are complex financial instruments that combine various slices of debt.
As a result, customers were stuck holding more than $800 million in securities that lost their liquidity and value when the market for auction rate securities began to collapse in August 2007, according to the SEC.
The SEC is seeking unspecified restitution and civil fines against the brokers.
Andrew Calamari, associate director of the SEC's New York regional office, said the case shows "how the recent turmoil in the subprime market has affected even investors who had no intention of buying subprime securities."
In recent months at least eight major investment banks, including Merrill Lynch & Co., Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley , have signed deals with federal and state regulators to buy back more than $50 billion worth of auction rate securities. The regulators alleged that the banks misled customers into believing that the investments were safe.
—
AP Business Writer Marcy Gordon contributed to this report.
Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
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| In The Eye of The Storm |
In The Eye of The Storm
John Browne
Sep 4, 2008
As we enter the height of the hurricane season, it may be worthwhile to recall, when considering the economy at large, the particular deception that lurks in the "eye" of the storm. After a raging tempest, the sudden appearance of the calm 'eye' can all too easily encourage people to leave their shelter in order to assess and even repair damage, exposing themselves to the often more devastating second leg of the hurricane.
We have long warned our readers of a coming real estate crash which would then lead to a credit crunch, and eventually a major round of bank failures. We have argued that these developments would be the precursors to a major recession, and perhaps a depression.
As predicted, the collapsing values of bonds backed by subprime mortgages did indeed lead to a collapse of the entire mortgage market, a bank liquidity crisis, a credit crunch and a steep fall in consumer confidence. This was the first leg of the storm, but the full blown banking collapse and the deep recession are not yet manifest. The conventional wisdom holds that the bullet has been dodged.
The markets are buying this hypothesis. Tempted by the latest crop of economic data that seems to show expansion, U.S. stocks have moved sideways, and even climbed slowly. The U.S. dollar has risen from its lows, and the rate of bank failures appears to be under control. In short, with gold off almost twenty percent from its highs, it looks as if many investors have concluded that the worst of the storm has past, and have decided look for good deals amid the stock market wreckage. Proceed with caution.
At its core, our economy is simply showing the effects of a national depletion of wealth caused by decades of consuming more than we produce and spending more than we earn. The natural corrective mechanism to such a condition is a recession. But recession is very bad for politics, especially in an election year. So, the potential corrective recession has been postponed by a massive injection of billions of dollars into the economy. At a time when we needed serious physical therapy, the government instead offered four massive pain killers:
First, the debased U.S. dollar has boosted exports and helped the GDP to remain positive.
Second, by setting interest rates below the rate of inflation the Federal Reserve discouraged savings and encouraged borrowing and spending.
Third, massive government lending kept the financial service industry solvent and the mortgage lenders operating.
Fourth, stimulus checks have kept American's spending money that they have not earned.
Although these government palliatives have succeeded in calming the immediate crisis (by saddling American taxpayers with massive liabilities), they have not cured the disease. If anything the huge doses indicate that the patient is getting far worse, even if in silence!
Last week, the FDIC announced that bank losses have tripled to $26.4 billion, leading to a fall of 86.5 percent in bank earnings. The Case-Shiller home price index shows American housing to have fallen in value by some 20 percent and still sliding. These massive movements have yet to be felt along the entire economic spectrum... but it is inevitable that they will be.
Don't be lulled into a false sense of security and start buying U.S. equities at seemingly knockdown prices. We are in the eye of the hurricane. Beware of the second leg!
***
For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book "Crash Proof: How to Profit from the Coming Economic Collapse." Click here to order a copy today.
More importantly, don't wait for reality to set in. Protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download our free research report on the powerful case for investing in foreign equities available at www.researchreportone.com, and subscribe to our free, on-line investment newsletter.
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: jbrowne@europac.net
website: www.europac.net
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| Is that deflation we smell? |
Is that deflation we smell?
Commentary: Stocks and commodities are both plunging
By Mark Hulbert, MarketWatch
Last update: 4:01 p.m. EDT Sept. 4, 2008
ANNANDALE, Va. (MarketWatch) - What do you call it when both stocks and commodities are plunging?
Can you say "deflation"?
To be sure, the monetary authorities, led by Fed Chairman Ben Bernanke, are doing everything in their power to keep this word out of our lexicon.
But trading sessions like Thursday are making it a lot harder for them to get away with it.
Not only did the Dow Jones Industrial Average ($INDU:
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$INDU 11,188.23, -344.65, -3.0%) drop some 350 points, commodities also had a bad day: Gold fell by $5 an ounce, for example, and a barrel of crude oil fell by $1.50.
Nor was Thursday's market action all that different than the pattern we've been seeing with increasingly regularity over the last couple of months. Oil is now more than $40 per barrel below where it stood in mid July, for example, and an ounce of gold bullion is now nearly $200 cheaper. Yet, far from providing the boost to equities that many otherwise expected, the stock market is essentially no higher today than it was then.
This is surprising because, other things being equal, lower commodity prices would reflect lowered inflationary expectations, which in turn would be good for equities.
But other things may not be equal now.
It would be one thing if inflation came down while the economy remained strong. In that event, the stock market would be shooting up right now--not plunging.
But inflationary expectations are receding today because of serious doubts about the health of the economy as a whole. And when the economy becomes weak enough, we should expect both stocks and hard assets to fall.
Unless Fed chairman Bernanke can pull more rabbits out of his hat, and soon, we should probably prepare ourselves for more days like Thursday.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
http://www.marketwatch.com/news/story/markets-plunge-gives-off-whiff/story.aspx?guid=%7B76EB81A3%2D7446%2D41B5%2D8702%2DBF3EA02B439A%7D
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| The Coming US Consumption Bust: 12 Reasons Why the US Consumer is in Serious Trouble and Faltering |
The Coming US Consumption Bust: 12 Reasons Why the US Consumer is in Serious Trouble and Faltering
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Nouriel Roubini | Sep 3, 2008
It is by now clear that the shopped-out, saving-less and debt-burdened US consumer is on the ropes and that there will be a significant and persistent contraction of real consumption for the next few quarters. About a dozen separate negative headwinds – to be described in detail in this note - are now hitting the US consumer while the positive effects on consumption of the tax rebates are already fading away.
That rebate boost was supposed to stimulate consumption until august of this year instead after a recovery of retail sales, real personal spending and consumption in April and May real retail sales and real personal consumption spending have fallen already in June and July. So consumers stopped consuming in spite of the tax rebates instead of spending such rebates (so far only 30% of them have been spent). This suggests that real consumption will certainly fall in Q3 and will continue to fall for a while into the middle of 2009. Real consumption did not fall in the 2001 recession and you have to go back to the 1990-91 recession to see a single quarter of negative consumption growth.
Why will consumption keep on falling for quite a while? There are at least a dozen separate factors explaining why we will now see a sharp and persistent fall in real consumption:
- US consumers are shopped out and saving-less; the low savings rate of the US household sector fell almost into negative territory as the positive wealth effect of rising home prices – until 2006 – led to overspending. Now a retrenchment of consumption and rise in savings is necessary
- Home prices are now falling and therefore households cannot use their homes as ATM machines – like until 2006 – and borrow against it to spend more than their income. Recent studies suggest that the wealth effect of housing on consumption is large, larger than previously estimated (closer to 12-14 cents on the dollar rather than 5-7 cents on the dollar)
- Home equity withdrawal (HEW) that peaked at $700 billion in 2005 is now down to about $24 billion (practically zero). And financial institutions are sharply cutting back on outstanding home equity loan obligations. Thus, borrowing against housing wealth is now collapsing. Even with moderate estimates of HEW effects on consumption (25 cents on the dollar rather than the 50 cents on the dollar estimated by Greenspan and Kennedy)
- There is an additional wealth effect of the stock market on consumption; and with major indices down almost 20% from peak this is an additional effect.
- The increasing credit crunch is spreading – based on various surveys – from subprime to near prime and prime mortgages, to home equity loans and now to credit cards, auto loans and student loans. So the price of credit/borrowing is rising while its quantity is falling and this will reduce the ability and willingness of households to borrow to spend.
- Debt ratios for the household sector are high and rising: the debt to disposable income ratio for average US households has increased from 100% in 2000 to almost 140% today.
- Not only debt ratios are high but debt servicing ratios are high and rising for households given the reset of interest rates to higher levels on mortgages, credit cards, autos loans, student loans and other consumer credit.
- Even after the recent fall in oil and commodity prices from their peaks such prices are about 50% higher than a year ago and 300% higher than six years ago. For any given income, rising oil, energy, transportation and food prices implies a reduction in real disposable income that erodes purchasing power. And lower income households have a larger share of their consumption basket going to food, energy, heating, transportation and gasoline; this the rise in commodity prices erodes their purchasing power more than for higher income individuals.
- Nominal and real wage growth has been anemic in the last few quarters and slowing down over time. Thus, real incomes – especially for workers – are not rising significantly.
- While GDP growth in Q2 has been robust (3.3%) the other measure of output – on the income side rather than on the demand side – that is the Gross Domestic Income (GDI) has been very weak (growing only 1.9% in Q2 and falling relative to Q2 of a year ago). So measures of income growth – and not that the gap between GDP and GDI has been rising over time for complex statistical reasons – suggest very anemic income growth that is bearish for consumption.
- Consumer confidence is sharply down and close to levels we have not seen since the two 1970s stagflation episodes.
- Now the last factor – job generation - that was supporting consumption in spite of the headwinds described above is faltering: employment in the private sector has fallen for 8 months in a row; and overall employment (including public one) has fallen for 7 months in the row). And other indicators of the labor market suggest persistent and continued weakness.
The 12 negative headwinds described above are significant and persistent while the only positive factor supporting consumption – the $100 billion of tax rebates – was temporary to begin with and failed to boost consumption even over the horizon (through all of Q3 of 2008) over which it was supposed to have an effect: consumption started to fall in real terms already in the latter part of Q2 (in June of 2008). And with consumption being 70% of aggregate demand the effect of such a fall in consumption (until at least Q2 of 2009) on GDP growth will be more severe and persistent.
Thus, expect to see a contraction of GDP in quarterly figures already in Q3 of this year and all the way until the middle of 2009. Since the US recession started in Q1 of this year (based on the five indicators used by the NBER) the 18 month U-shaped recession will be a W-shaped recession given the blip in GDP in Q2 following the tax rebates and an unsustainable improvement in net exports. So we will observe a double-dip W-shaped recession.
The improvement in net exports is not sustainable because the view that the rest of the world would rescue the US from a recession through a boom of US exports is now challenged by two major factors: the US recession is spreading to all of the G7 and almost all of the advanced economies (representing 55% of global GDP); and since US exports are the imports of Europe, Japan, Canada, etc. the fall in these economies will slow down their imports of US goods. Second, the recent strengthening of the US – as the G7 are slumping into a recession – will reduce the improvement of the US trade deficit.
A shopped-out, saving-less and debt-burdened US consumer is now stretched like never before, at its tipping point and starting to falter and contract spending. Since we have not seen a fall in consumption – even for a single quarter - for the last 18 years the effects of this sharp retrenchment of US consumption will be severe and cause a protracted and sharp US recession, at least a 18 months recession rather than the 6 months recession predicted by a delusional economic consensus.
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| U.S. stocks slide as global slowdown feared |
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| FDIC nees half a trillion to rescue banks |
The Federal Deposit Insurance Corp.'s (FDIC) list of troubled banks has increased by 30 percent this quarter, and this jump is causing the FDIC and the banking community to prepare for tomorrow’s problems today.
The FDIC may have to borrow money from the Treasury Department to handle an expected wave of bank failures coming down the road, according to the Wall Street Journal.
It would not be surprising if this were to occur, according to Chris Whalen, managing director of Institutional Risk Analytics. In an interview with CNBC, Whalen said the FDIC needs a backstop. (To listen to the full interview, watch the video.)
"They need about a half a trillion dollars in borrowing authority, and they need a vehicle to own these banks while we triage them and sell them."
Whalen added that he expects big bank failures might be on the way.
"It depends on the loss rate," he said. "If we are way over 1990s levels, by say the third quarter, then I would tell you there’s going to be some institutions that may not be able to raise private capital and may need a bridge."
The discussion was prompted by an announcement Tuesday by the FDIC that it was increasing the number of banks on its watch list to 117, up from 90 in the first quarter.
“We don’t think this credit cycle has bottomed out yet,” said FDIC Chairman Sheila Bair at a press conference Tuesday. “I don’t like to make predictions, but I think it’s going to continue to be very challenging, and as I said I think the number of banks and assets on the troubled bank list will continue to go up.”
http://www.cnbc.com/id/26421989
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| "Don't Cry fror me Argentina". |
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| Dead Men Walking - John Mauldin's Outside the Box E-Letter---from Betty |
Dead Men Walking
By Bennet Sedacca
Last Friday's letter was about the fact that it is not just Freddie and Fannie. There are other problems. The Weekend Edition and today's Wall Street Journal are filled with stories about the problems with Freddie and Fannie. The assumption in so many quarters is that they will soon need government assistance. The only questions seem to be when and in what form? Can this wait until a new president is in place? Congress is leaving town soon. Can it wait until the lame duck session?
As I have been writing for well over a year, the credit crisis is going to be deeper and take longer to correct than the main stream media and economists think. Losses at banks are going to be much larger, and they are going to bleed for a long time. That means we are going to see more banks failing.
Bennet Sedacca, who I quoted in last week's letter, sent out a new letter this morning, providing a list of stocks he thinks may also be in trouble, his "Dead Men Walking" list. He also notes several banks that will be the beneficiaries of the crisis as they gobble up weak competitors.
Caveat: I am not a stock guy, and can't comment on any of the specifics of what Bennet writes about, but I thought it is important for my readers to understand that this crisis is not going to be over when Freddie and Fannie are nationalized. There are still some whales out there left which are coming to the surface. Warning: this is not pleasant reading.
Bennet is the president of Atlantic Advisors in Winter Park, Florida.
John Mauldin, Editor
Outside the Box
Dead Men Walking
by Bennet Sedacca
Dead Man Walking - Originally, a phrase in a poem by Thomas Hardy in 1909, but later in a work of non-fiction by Sister Helen Prejean, A Roman catholic nun and one of the Sisters of Saint Joseph of Medaille. Prejean later wrote 'Dead Man Walking', which became a hit movie in 1995. The title comes from the traditional exclamation "dead man walking, dead man walking here" used by prison guards as the condemned are led to their execution.
Death Row - A term that refers to the section of a prison that houses individuals awaiting execution. It is also used to refer to the state of awaiting execution, even in places where a special section does not exist. As of 2008, there were 3,263 prisoners awaiting execution in the United States.
The Last Mile - "I guess sometimes the past just catches up to you, whether you want it to or not. Usually death row is called 'The Last Mile'. We call ours 'The Green Mile'-the floor was the color of faded limes." - Tom Hanks as Paul Edgecomb in 'The Green Mile'.
Are There Corporations that are "Dead Men Walking"?
The title of this piece sums up how I feel about the current credit markets. When I first started in the industry in 1981 we were worried, but only about on | | |
