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Manipulation In the Financial Markets

Posted on by Nirav
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In July and August, the USD has actually become stronger against most other currencies, on apparently no news. Gold had also dropped as low as $790/oz from a high of $1030/oz this year, even though there is a shortage of physical gold in the US and the US mint had stopped selling gold coins like the American Gold Eagles. I was wondering if there was some manipulation going on in these markets.

Hedge fund manager John Lee thinks that gold prices are being manipulated in an effort to keep up the dollar afloat.

According to an article on Forbes, the central banks of the US, Europe and Japan planned in mid-March to prop up the US Dollar if it continued to slide.

Officials from the U.S. Treasury Department, Japan’s Finance Ministry and the European Central Bank reportedly drew up a currency contingency plan over the weekend of March 15-16.

The officials did not specify an exchange rate for initiating the dollar rescue plan, but in the event of a free-fall they agreed to aggressively buy the greenback and sell yen and euros.

Japan was to supply yen necessary for the underlying currency swaps. The plan also called for using a previously established swap mechanism between the United States and Europe.

Analysts said even though a rescue never took place, the fact that global monetary officials had agreed on action would be important in the future if the dollar were to tumble again or other exchange rates move very sharply.

Hmmm…who are these analysts and why should we trust what they say?

The Government and Wall Street has been less than forthright in the past. The CEO’s of Fannie Mae and Freddie Mac said a few months ago that they’re in no danger, but Buffett just declared game over for those two.

I’m getting tired of the bankers and government interfering in the natural course of things. They’re bailing out some market participants to the detriment of the taxpayer. People aren’t facing any adverse effects for taking on insane amounts of risks. If it pans out, they give themselves a bonus. If not the US taxpayer bails them out! Effectively, they’re socializing losses while privatizing profits.

Fannie Mae’s CEO claims that they make housing affordable for millions of Americans. However, if they went bankrupt, there would not be money available for huge home loans and home prices would fall. THAT would make home prices more affordable. Yes, it would be difficult for people to get a mortgage to buy a home, but it would encourage regular saving and it would take longer for people to buy their first home. But in the long run, housing would be a lot cheaper with lower payments towards mortgage interest and thus lower effective home costs.

The fact that the two CEOs of Fannie Mae and Freddie Mac took home $32 million last year while saddling the US Taxpayers with $500 Billion in losses means they can’t be trusted. If this isn’t outright theft, then at least it’s either gross misrepresentation, negligence or stupidity and they ought to refund their salaries, if not do serious jail time.

And talking about government manipulation, the Pakistani Government just introduced price controls on the most popular Karachi Stock Exchange Index. They got tired of watching the stock market drift lower every day, so until the officials decide otherwise, the KSE-100 cannot go below yesterday’s two-year low of 9,144!

Lessons From WCI’s Bankrupcy

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I just found out from The Declining Market that Florida luxury Condo builder, WCI Communities filed Chapter 11.

Over a year ago I shorted the stock at $17. Then that jackass Carl Icahn went and put in a bid to buy the company at $22.50 a share, in order to “unlock the hidden value” of WCI’s assets. That’s when I closed my position at a loss. Apparently, there is no hidden value in the assets and WCI’s stock is now completely worthless!

Sadly, I didn’t have the fortitude or the conviction to hold my position and I cried uncle at the first sign of trouble. That same scenario was repeated when I shorted Countrywide last April. The stock went up 10% and I closed my short position. Then it went straight down!

Right now, I’m short Capital One Financial (COF). But instead of entering my position fully, I decided to venture in slowly and buy more if it goes up. I’ve entered a 50% position so far and I’m hoping it goes higher so I can short at a higher price.

I’m convinced that if people can’t pay their mortgages, then they’re sure not going to be paying the credit cards. However, there’s a chance I might be early, so I should be willing to set a wider stop-loss and be willing to hold my position for 6 months.

On my short positions, I usually set a 10% stop loss, because there is an inherent bullishness to stock prices. This bullishness does not come from my expectation of a continued rise the profitability of stocks, but rather due to inflation. Inflation causes price increases, which leads to slightly higher profits, which leads to slightly higher stocks prices!

One lesson we should all take from WCI’s bankruptcy is that even rich people make mistakes. Carl Icahn was wrong about WCI – there simply wasn’t an value to be had from its assets. Billionaire Jerry Lewis also made a mistake in buying a large chunk of Bear Stearns early this year at nearly $80/share. I was soon sold for only a couple of bucks a share to J P Morgan.

Don’t blindly buy a stock just because some famous investor is buying it!

Cartoon Capitalism

Posted on by Nirav
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I’m often extremely pessimistic on the state of the US economy. In public settings my doom and gloom predictions seem to depress people so I tend to restrict my rants solely to my blog. So it makes me happy when I read an article that agrees with my thoughts on the state of affairs.

CARTOON CAPITALISM
by Bill Bonner

America’s largest mortgage finance companies, Fannie and Freddie, have so much water in their lungs it will take at least $25 billion of the public’s money to save them. Possibly $300 billion. Were it up to us, we’d leave them on the beach.

But, last week, the U.S. Senate bent down and pressed its large mouth onto those gaping traps of the mortgage twins – gurgling into them a corrupt breath of life. Since the two hold one out of every two mortgages in the nation, in effect, Congress is nationalizing the U.S. housing stock itself. Henceforth, citizens will pay not only their taxes to the government, but their mortgage payments too.

In America itself, how this came to be is the subject of little concern. But despite the lack of interest, it is the subject of the next 500 words or so.

At a speech in Vancouver, James Kunstler seemed positively delighted. Finally, gasoline over $4 a gallon was going to do what generations of artistic scorn could not – destroy Fannie and Freddie’s collateral. Kunstler’s critique of American suburban vernacular architecture is that its products are not real houses at all – but “cartoon houses.” They have porches that look like real porches from a distance, but they are too narrow to sit on. They have shutters too – nailed to the wall, making them completely useless. They may have “picture” windows…looking out on nothing…or no windows at all. And they wouldn’t exist at all were it not for cheap credit and cheap gasoline.

Of course, the same may be said of America’s – and Britain’s – entire economies during the last 20 years. The loose credit that built cartoon houses also constructed cartoon economies; they look like real economies, but they are essentially perverse, consuming wealth rather than creating it.

For proof, we return to Fannie and Freddie. Here were two companies that appeared to be helping Americans own houses. But since they were created, homeowners’ equity – that portion of the house actually owned and paid for by the homeowner – fell from 70% to below 50%. Currently, Americans’ total equity is lower than their mortgage debt. As a whole, the nation’s homeowners are “upside down,” in other words. Nearly 9 million Americans have zero or negative equity already – and house prices are still falling.

How comes this to be? The answer is simple: lenders lent more than the houses were worth to people who couldn’t pay it back anyway. This Looney Tune approach to finance radiated to all points of the economy. People pretended that they earned more – spending more and more money to buy more and more goods and services – but wages did not really increase. Then, they bought houses – believing the roofs over their heads were investments, rather than consumer items. With no down payment, no proof of income, and zero interest loans – for most of the new buyers, home ownership was merely a dangerous conceit. Now that the roofs have caved in, it is a staggering burden.

The “consumer economy” was always a mockery. No serious economist ever suggested that you could get richer by consuming wealth. But that didn’t make consumerism unpopular. The more people consumed, the more GDP went up. GDP measures output, not wealth creation; but who could tell the difference? In a cartoon economy – no one. Besides, spending made people feel as though they were getting richer.

Then, whenever the consumer threatened to come to his senses, the feds rushed to “stimulate” him – by giving him more of what he least needed, more credit. More spending kept the cartoon economy running – allowing the consumer, the businessman and the speculator to add to his burden of debt. In 1971, when the United States went off the gold wagon, household debt was less than 50% of GDP. Now, it is more than 100%. And now, the poor consumer’s knees buckle; he will be forced to work the rest of his life just to keep up with his debt burden, let alone pay it off.

Even the rentiers were bamboozled by their own claptrap. Stocks rose from ’82 to 2000…fell heavily to 2002 and bounced back. For the last 10 years, shareholders have gotten little for their effort. In July of ’98, the FTSE hit a high of 5,458. This month, it has reached 5,625. And in America, if stock prices were quoted in gallons of gasoline, the Dow would take the driver no further in 2008 than it did 40 years ago.

The cartoon capitalists did it all backwards; they are supposed to exploit the workers, not be exploited by them. But while consumers and investors were going nowhere, corporate managers and Wall Street hustlers were getting rich. The two Bozos running Fannie and Freddie, for example, pocketed about $32 million between them last year – during a period in which the companies lost almost $5.2 billion – not to mention the losses to shareholders. And on Wall Street, managers paid out $250 billion in bonuses in the 4 years leading up to the credit crunch. The firms declared a profit and paid bonuses when the bets were made; they didn’t wait to see how they turned out. Thus did the big banks and big brokers become capitalists without capital, dependent on the gullibility of investors to keep them in business. And when investors began to wise up, they turned to the public for capital support.

What kind of scam is this? It may look like capitalism from a distance. But this is not real capitalism; this is cartoon capitalism – run by clowns, who sell freak investments to chump investors, and encourage the lumpen householder to ruin himself.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis . I strongly recommend his latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics.

Since I mentioned that Fannie Mae and Freddie Mac were going to go bankrupt, their stocks have plummeted 50%. I think its time to start shorting other financial sectors like consumer credit card companies.

Fannie Mae & Freddie Mac Collapse

Posted on by Nirav
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About 5 weeks ago I suggested that both Fannie Mae and Freddie Mac were going bankrupt and their shares were going to hit single digits in 12 months. Well it looks like the market believed that too and their shares were punished. Instead of having to wait a year, the stocks dropped like bricks within the month!

According to Nouriel Roubini, renowned Professor of Economics & International Business at NYU’s Stern Business school, this is the worst financial crisis since the Great Depression and the worst U.S. Recession in the last few decades.

The FDIC that has already depleted 10% of its funds in the rescue of IndyMac alone will run out of funds and will have to be recapitalized by Congress as its insurance premia were woefully insufficient to cover the hole from the biggest banking crisis since the Great Depression

Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.

Wow, those are strong words! Practically every stock in the financial sector has jumped today, probably due of extreme oversold conditions and not because of any underlying change in the fundamental scenario.

Sadly, my beloved Oil & Gas stocks are down. It may be a sector rotation out of energy stocks and into the financials. But so long as my Canadian Income Trusts continue to provide me with dividends and passive income, I’ll continue to hold them.

But I might enter new short positions in the financials if the stocks rally significantly above these levels. Fed Chairman, Ben Bernanke announced today that FNM & FRE were “in no danger of failing”. I don’t know if I believe him – sounds just like a few months ago when the government telling us there’s no recession. Meanwhile everything (except housing) is getting more expensive and unemployment is rising. And as Jim Rogers says that “the only people Bernanke cares about are his buddies on Wall Street”!

There's Still No Recession!

What Is Jim Rogers Buying Now?

Posted on by Nirav
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A couple of days ago, legendary investor, commodity bull and one-time partner of George Soros, Jim Rogers, was interviewed by Betty Liu of Bloomberg’s Singapore office. It seems that Jim Rogers is also of the opinion that Fannie Mae is going to lose a lot of money along with other investment banks.

He’s still bullish on commodities like oil and food grain and he’s bearish on the US Dollar. Surprizingly, he’s also bullish on Arline stocks.

Here’s an excerpt of the relevant portions of the interview:

Financial Sector

LIU: All right. Jim, first, talk to us about the story of the week that we’ve seen so far, Lehman Brothers, you know, you’ve been very critical so far about what’s been going on on Wall Street, the accounting, all of that. Do you believe, I mean this is relevant – do you believe that Lehman Brothers is in fact in so good shape that they’ve got no liquidity problems or what’s your view on this right now?
ROGERS: Well, okay, I am still all – short all of the investment banks on Wall Street through the ETF. I know they are all in trouble. I know most of them have phony accounting. And you know, in bear markets, they all go down to eight. So, I just presume they are all going to go to eight before it’s over, before the bear market is over.
LIU: Do you believe that we could another Bear Stearns as we did in March?
ROGERS: Oh, why not, sure. There are certainly – and I’m also short Citibank and I’m also short Fannie Mae. So, you know, some of these companies have – have horrendous balance sheets and if the bear market has a ways to go, which in my view, it does, then you are going to see some really, really low prices. But, Betty, there’s nothing unusual about this, just go back and look at any previous bear market. Financial stocks sell at unbelievably low prices during bear markets. This was not going to be any – well, this one may be a little different because it’s just going to be worse for the financial companies during this bear market, because the excesses during the past five or ten years have been so horrendous in the financial communities.

LIU: All right. And Jim, you know, I want to turn back to, of course, the Fed and the banks and all of that. You were talking before about some of the stocks that you’re short on. Are you short on Lehman Brothers?
ROGERS: I’m short the ETF, Betty, the investment bank ETF, which means I’m short all of them. I am not short any specific investment banks. First of all, I have too many friends at all of those places, I don’t want to short any of them specifically. So, I am just short at the ETF, which means I am short all of them, I mean some would do well, some will do probably too badly, but the ETF in my view is going to go down a lot more.
LIU: Well, does what happened with Lehman Brothers over the past week, does it perhaps stoke your interest in shorting Lehman along with Citigroup? And Fannie, I believe is the one you talked about as well.
ROGERS: I’m already short Fannie Mae and Citibank, and have been for sometime. I’m just going to kind of stay with the ETF. It’s easier for somebody like me, who’s too lazy to spend a lot of time on any specific one, except for Citibank and Fannie Mae.

Monetary Policy

LIU: All right, Jim. So, tell us, you have also been very critical of the Fed and Ben Bernanke. I want to ask you first one thing. How do think the Fed has handled so far what’s been going on on Wall Street? You think that they helped situations or actually made things worse?
ROGERS: They made things worse, Betty. They printed huge amounts of money, which has caused great inflation which could cause the dollar to go down, and the Federal Reserve has taken on something like $400 billion of bad assets on to its balance sheet. Now, you and I as American taxpayers are going to have to pay off that debt some day. What’s Bernanke going to do? Get in his helicopter, and fly around, collecting bad debt? Is he going to start repossessing cars, repossessing houses that go bad? I mean, this is insane Betty, the Federal Reserve has $800 billion on its balance sheet. They have already committed $400 billion to bad debt. What then they are going to do next? Where are they going to get the money the next time things start going wrong?

Investment Strategy

LIU: Okay. Okay, well, given that scenario, Jim, as an investor, where are you going to put your money right now?
ROGERS: I own commodities, I have been buying agriculture, I bought airlines today. I bought a lot of airlines around the world today, both stocks and bonds. Swiss franc, Japanese yen, renminbi, these are the few things I have been buying recently.

Airlines

LIU: You bought airlines? A lot of people are very bearish on the airlines, talking about the fuel cost. Why are you buying airlines?
ROGERS: Well, Betty, you just got through the same why, everybody is very bearish. No, I don’t buy things just because people are bearish, but I fly a lot, and the planes are full. You cannot buy a new – if you order a new plane today, you couldn’t get it for several years. This Boeing and Airbus have problems. You read every day that the airlines are cutting back their capacity. Fares are going up. I mean, Betty, everybody knows about the fuel cost. Is there any airline left that doesn’t know we have fuel problems? They are adjusting for all of it.
LIU: Well, that’s true. But there’s also talk about bankruptcies in the airline industry. And you think some could go bankrupt?
ROGERS: How much more bullish in the news do you want? Twenty-four airlines have gone bankrupt this year. That’s great news. You know, five out of the seven largest American airlines went bankrupt during this decade. So, fine. Bankruptcies are signs of bottoms, not signs of tops.

Commodities

LIU: Right. You know, staying with oil and commodities, we’ve seen a pullback in some commodities in recent months. But which commodities do you like right now, Jim, and which don’t you like?
ROGERS: Well, I mean, yes, a lot of commodities have come down pretty hard. If people are talking about a bubble, I’d like to know what they’re talking about. I mean, many commodities, nickel, zinc, lead are down 50 percent. Silver is down 80 percent from its all-time high. Sugar is down 80 percent from its all-time high. What kind of bubble is that? Cotton is down 40 percent from its all-time high. Coffee is down 60 percent from its all-time high. I have been buying agriculture recently, I’m holding off a little bit right now because it looks like Congress is determined to do something to drive down commodity prices. If they do, it’ll be a fantastic buying opportunity and I’ll buy more.
LIU: Jim, you – .
ROGERS: But what I bought most recently is more agriculture.
LIU: More agriculture? In China, did you buy?
ROGERS: I bought agriculture stocks in China. It’s not legal for – I mean, it’s almost impossible for foreigners to buy commodities – commodities and sales in China.
LIU: Right. Okay, also, you’ve said before that we’re half- way through the commodity bull run. You still think that, or I mean how long can this bull run last for?
ROGERS: Well, Betty, there are number of acres devoted to wheat farming. It’s been declining for 30 years. The inventory of food is at the lowest level in 50 or 60 years. We are burning a lot of our agricultural products in fuel tanks now, as fuel. That’s useless, that’s hopeless. Talk about a bubble, that’s a bubble. It’s crazy that we’re spending so much money burning our agricultural products as fuel. But you can go on a long time, nobody has discovered any major oil fields for over 40 years. Betty, all the oil fields in the world are in decline. I mean, there’s been one lead mine opened in the world in 25 years. The last lead smelter built in America was built in 1969. Unless somebody starts bringing on a lot more capacity soon, that bull market has got a ways to go.

Oil

LIU:All right. Jim, also talk to us about oil. You know, you’ve been very bullish on oil. We’ve had a lot of people talk about, you and I had a debate about whether or not there’s speculation in oil markets right now. You say no, others say yes, like Soros, he says it’s going to bubble. What do you know that others don’t about the oil market?
ROGERS: Look, look, Betty, there are always speculators in every market. Look at the New York Stock Exchange right now. You think there aren’t any speculators down there on the floor of the stock exchange? There are always speculators. That’s what business is all about. I submit to you that most of the people and – I don’t know about most of the people, I shouldn’t say that, but we know that the IEA, the definitive authority on oil has said that the world has an oil problem. The Saudis have told Bush that we have an oil problem. Betty, if there is lot of oil, please, would somebody tell us where it is, so we can all invest in it? The world has a serious oil problem. Now, Betty, that does not mean that oil cannot go down 50 percent. During this bull market since 1999, oil has gone down twice by 50 percent, going down by 50 percent in 2001 and again, in 2000 whatever it was, ‘05 or ‘06. So sure, you can have big reaction in any bull market. But that’s not the end of the bull market. There is no supply of oil unless you – somebody can tell us where the oil is, the bull market in oil has years to go despite new corrections which may or may not come.
LIU: Well, but you know, and I know you always hate having me ask you about – about limits or caps and all of that. But, given the supply/demand situation that you’re talking about, how high can oil go?
ROGERS: Betty, I know you – how you’re paid to ask questions like that, but I don’t know the answer. I’m not smart enough. I know that unless somebody discovers a lot of oil, the price of oil can go to $150, $200. You pick the number.

U.S. Dollar

LIU: All right, Jim. And I’ve got to turn to the dollar very quickly. What do you make of the comments by Bernanke earlier this week, noting the dollar slide, you have been very, very critical of Bernanke on this.
ROGERS: It is astonishing. Now, this is a man that under oath in Congress said, “If the price of the dollar goes down, it doesn’t affect ordinary – it doesn’t affect most Americans.” So, I almost fell out of my chair when I saw him say that. We know the man doesn’t know about markets, we know he doesn’t know about the currencies. Now, we know he doesn’t even understand civil economics, simple economics. So, I was astonished to see him, what, two or three days –
LIU: Right.
ROGERS: – suddenly said, “Well, if the dollar goes down, it affects us all.” It’s called inflation. So, somebody’s been teaching him economics. It’s about time, he should go back and take Economics 101.

Should You Believe Incompetent CEOs?

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After leading the company’s stock price down 60% in a year, Freddie Mac‘s CEO, Richard Syron, is doing the rounds trying to prop up the stock with feel-good stories. He tried to reassure investors that the worst is in the past and that the future will be brighter than ever.

According to Forbes,

Syron reiterated previous expectations, saying the company expects revenue growth of 15 percent to 20 percent this year, but expects to see losses from bad mortgages rise to as much as $6 billion this year.

“Weakening housing prices and housing activity have led to a punishing deterioration of credit which has hurt our results, along with those of other market participants,” Syron said.

However, the company is well-suited to ride out the housing bust because the home loans that Freddie Mac holds or guarantees are far less risky than those held by other lenders, he said.

Forgive my skepticism, but isn’t this exactly what Countrywide’s CEO Angelo Mozillo said in the beginning of last year when he was dumping stock hand over fist while claiming that CFC would be taking market share from the other lenders that were going out of business.

Anyway, I think its a good omen – I shorted Freddie Mac (FRE) and Fannie Mae (FNM) today at the open. So far I’m pretty happy with the result. FNM was down ~8% and FRE was down ~2.5%. Like I said yesterday, I wouldn’t be surprized to see these stocks in the low single digits in a year. [Note: this is not a stock recommendation – always do your own due diligence]

Time To Go Long The Dollar – 2

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This post is a follow-up from a previous post about Going Long The Dollar. There were some valid arguments for being bullish on the dollar, however, based on yesterday’s economic news, they no longer sound very convincing.

The jobless claims came out and the national unemployment rate is now at 5.5% (and this is after the bogus birth-death model numbers that are used to under-represent the actual unemployment figures).

Oil prices shot up 8.4% to $139/barrrel, marking the highest ever one day gain for oil prices. This occurred after the U.S. dollar nosedived on speculation that the European Central Bank would raise its key lending rate and on worries that a bigger-than-expected spike in unemployment meant the U.S. economy was far weaker than feared.

I actually had taken a small position in RYBSX, but I closed it for a small loss after hearing Friday’s news.

It’s much easier to predict long term trends rather than short-term trends. In the long term, I still think the Dollar is going down, so there’s no point buying RYBSX – might as well just stick to my Australian Currency shares ETF that has done so well for me. I continue to believe that we’re going to see stagflation and have been investing accordingly. I think it commodities like gold and foreign currencies will continue to do well.

I also think it’s much easier to make money on sure things like Countrywide(CFC) and WCI Communities (WCI) going bankrupt. (Disclaimer: even though my direction for the CFC and WCI trades was correct, I was just a few weeks early and still lost money!). I’ve been harboring suspcions about Fannie Mae(FNM) and Freddie Mac(FRE) going bankrupt. Not wanting to get in to early, I’ve missed the major decline in both stocks, but there seems like theres still a bit of downward movement. Let’s see how that pans out.