Archive for August, 2008

Weekly commentary September 2 through 5

Sunday, August 31st, 2008

This week we saw the Market tumble, rebound, and then end the week in a tumble. Used to be that the DOW would go up or down 50-79 points a day. Now a normal day is 180 points, up or down. This makes trading very scary for investors. Buy shares in a stock today, tomorrow those shares may be down 4-5 points.
Along with this volatile price activity, the exchanges are experiencing significant reduction in trade volume. Who wants to buy shares when those shares may not be worth anything tomorrow.
This week we saw GDP advance to 3.3. However, when the economists looked deeply into the numbers, they saw that much of the growth was from the stimulus package that all but ended in July. For the second half of this year, the GDP is expected to be reduced. This was shown clearly when the Department of Commerce reported that personal incomes fell 0.7% in July, when 0.1% was expected. And disposable incomes fell 1.7%. That is a huge number, given that the stimulus package was just released. This week Dell reported a 17% drop in earnings.
For the week, the DOW fell 1%, the S&P fell 1.18% and the Nasdaq fell 3.47% For the month of August, the Dow gained 1.45% and the S&P 500 gained 1.22%. Here’s the scary part, September is generally a weak trading month for stocks. Peter Cardillo, chief market economist at Avalon Partners Inc. said “Traditionally September is a weak month for stocks and I don’t think we’re going to escape that. I do think we are going to stay in a trading range. I don’t see this market falling out of bed and going below the July lows.”
This week we saw another bank failure. That makes 10. The FDIC said that it was looking to borrow money from the Feds to shore up the reserves. Unofficially, it seems there are 300 banks on the list.
Next week should be even more rocky. Hurricane Gustov is coming to town, bringing with it miles of devastation. Gustov comes on the third anniversary of Katrina. Evacuations are already underway in Louisianna. Already Gustov is responsible for 80+ deaths.
Next week the news will come with a shortened 4 days. We’ll see truck and auto sales that have been down for the year. Tuesday will show construction spending, that has also been down (both in commercial and residential). Thursday we’ll have the precursor to the Unemployment report due out Friday…the ADP report. But watch for the 10:00 ISM Services report. We saw the Michigan sentiment report that came out much higher than anticipated. So look for the ISM Services report to be positive.

How the Chicago Boys Wrecked the Economy

Friday, August 29th, 2008

Full story here.

“Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JP Morgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the worldâ??s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinichâ??s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002 (more…)

Don’t cry for me, Argentina

Friday, August 29th, 2008

Full story here.


This Time is Different: A Panoramic View of Eight Centuries of Financial Crises by University of Marylandâ??s Carmen Reinhart and Harvardâ??s Kenneth Rogoff makes for perfect reading when flying between the US and Argentina.

There is perhaps no better analysis than Reinhart and Rogoffâ??s on the history of sovereign defaults; and, as such, Reinhart and Rogoffâ??s paper was ideal reading material when traveling between the US and Argentina, for the sovereign defaults that happened in the past to Argentina will soon be happening to the US.

But a US default will make Argentinaâ??s debt defaults pale both by comparison and consequence. The US, unlike Argentina, is the worldâ??s largest economy, the issuer of the worldâ??s reserve currency and the worldâ??s largest debtorâ??and a default by the US on its debt will shake the very foundations of our increasingly fragile global economy. (more…)

Weekly Commentary August 25-29

Sunday, August 24th, 2008

Can consumers really believe that the price of oil is based upon supply and demand? This week, Thursday, we saw the price of oil jump from $111/barrel up to $121/barrel. Then Friday came and the price dove back down to $114. Surely supply and demand had no bearing on the price. (more…)

Fannie & Freddie: Nothing Left

Wednesday, August 20th, 2008

Full story here. Still wanna “dollar cost average” with your broker? I’m waiting for the “down by half and you’re done” party (if your stock plunges more than 50% in one day, it’s over, regardless of assets, PR or voodoo). Use ShadowTraders to make money and keep it.

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) fell 22.2% and 24.4% yesterday, respectively, unveiling some of the lowest share prices seen since the late ’80s, when the average home cost around $90,000. In perhaps the saddest indication of just how pitiful these stocks are, Annaly Capital (NYSE: NLY) — a small, scarcely followed REIT that purchases Fannie and Freddie securities — now eclipses the market cap of both Freddie and Fannie. The customer, as they say, is always right.

Fueling the decline was a Barrons article highlighting the truth: There’s literally nothing left for common shareholders, particularly for Freddie. (more…)

Bigger Financial Shocks to Come…

Tuesday, August 19th, 2008

Full article here. Oooh, what a bummer for a Tuesday. The nuclear winter we may face is financial and not martial.

“The U.S. financial crisis has cut so deep â?? and the government has taken on so much debt in misguided attempts to bail out such companies as Fannie Mae ( FNM ) and Freddie Mac ( FRE ) â?? that even larger financial shocks are still to come, global investing guru Jim Rogers said in an exclusive interview with Money Morning .

Indeed, the U.S. financial debacle is now so ingrained â?? and a so-called â??Super Crashâ? so likely â?? that most Americans alive today won’t be around by the time the last of this credit-market mess is finally cleared away â?? if it ever is, Rogers said.

The end of this crisis â??is a long way away,â? Rogers said. â??In fact, it may not be in our lifetimes.â? (more…)

Weekly post August 18 thru August 22 2008

Sunday, August 17th, 2008

This week we want to look at what Warren Buffett and his Bershire Hataway Inc. holdings are investing in…
These are the latest positions… * American Express Co. (NYSE: AXP) over 151.6 million shares. * Anheuser Busch Cos. Inc. (NYSE: BUD) reduced to 15 million shares * Bank of America Corp. (NYSE: BAC) 9.1 million shares * Burlington Northern Santa Fe (NYSE: BNI) 63,785,418 shares * Carmax Inc. (NYSE: KMX) 21.3 million shares * Coca Cola (NYSE: KO) roughly 200 million shares * Comcast (NASDAQ: CMCSA) 12 million shares * Comdisco Holdings (CDCO) over 1.5 million shares * Costco Wholesale (NASDAQ: COST) 5.254 million shares * Gannett Co. (NYSE: GCI) 3.447 million shares * General Electric Corp. (NYSE: GE) 7.777 million shares * GlaxoSmithkline (NYSE: GSK) 1.51 million shares * Torchmark Corp. (NYSE: TMK) more than 3.51 million shares in multiple lots * US Bancorp (NYSE: USB) more than 68 million shares in multiple lots * USG Corp. (NYSE: USG) 17.07 million shares * Union Pacific Corp. (NYSE: UNP) 8.9 million shares * United Parcel Service (NYSE: UPS) 1.429 million shares * WABCO Holdings (NYSE: WBC) 2.7 million shares * Wal-Mart Stores inc. (NYSE: WMT) over 19.9 million shares in multiple lots * Washington Post (NYSE: WPO) over 1.72 million shares in multiple lots * Wells Fargo (NYSE: WFC) over 290 million shares in multiple lots * Wellpoint Inc. (NYSE: WLP) 4.8 million shares * Wesco Financial Corp. (NYSE: WSC) 5.7 million shares

Notice that there are only 2 banks in the midst. This week banks got caught with their pants down. Dozens of banks / brokerages were involved in the auction rate securities implosion. More banks required to buyback billions of dollars in these securities. There are $330 billion funds tied up and suddenly illiquid.
Bank to bank, clients were told that they were in cash equivalents, or money market accounts, when in fact they were in these complicated, very risky funds. Clients were not shown a prospectus nor told that there was any risk. This has put 145,000 customers in financial hardship and forced municipalities to pay dramatically higher interest payments for their bonds. Many municipalities own funds were placed into these securities. They watched their capital become illiquid, suddenly unable to pay salaries for their police officers and fire men.
Last week, three brokerages, UBS, Merrill Lynch, and Citicorp were required to buy back a collective $60 billion. Citi paid a hefty fine of $100 million for its involvement, while UBS paid $150 million in fines. New York Attorney General Cuomo has not finished with Merill.
This week,Wachovia Securities finalized negotiations with Missouri Secretary of State Robin Carnahan and other state regulators. They are paying $50 million in fines and repurchasing nearly $9 billion in auction rate securities. This will repay 40,000 customers. Commerce Bank is repurchasing $545 million, affecting 140 customers. J.P. Morgan and Morgan Stanley will now buy back a combined $7 billion in securities and pay $60 million in fines.
Cuomo isn’t done yet. He announced this week that there are another two dozen+ banks right now in negotiations. Actions such as these from banks and brokerages have clearly eroded customer / investor confidence. Being told by your banker that you are in insured, risk-free money market accounts when in fact you are in very risking complicated instruments is damaging to the banking industry. Who can now trust anything bankers say?

Here is the completely unethical part of this debacle…In May 2005, PricewaterhouseCoopers issued an opinion concerning auction rate securities, stating that auction rate securities should not be cashlike equivalents. “Due to the absence of an absolute put option granted to investors, the classification of this asset class as cash equivalents per FASB 95 is no longer possible. The maturity of ARS will be determined by the final maturity of the underlying bond. The majority of issues have stated maturities well beyong 10 years.” What this means is that the bank industry knew they could not legally market these securities as money market / cas equivalents, and did it anyway.
What makes this even worse is that on May 31, 2006, the SEC censured 15 brokerages for improper practices in the ARS market, finding that they had improperly disclosed the risks involved. The banks included Bear Stearns, Citicorp, Goldman Sachs, JP Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, (each paying $1.5million in fines), Suntrust, A.G. Edwards and its parent, Wachovia (all paying $125,000 in fines), Bank of America (paying $750,000 in fines). Notice that these are the same brokerages that were fined millions in 2008, just 2 years later…they learned nothing. They did not change their operating basis.
For UBS’s customers, the healing process will be very slow. Customer dissatisfaction is great and customers are fleeing. Lots of very wealthy clients were burned. UBS knew the auction rate securities were very risky. Emails collected by the SEC show that UBS began dumping the sucurities on its wealthy clients to reduce their own exposure. “As you can imagine during these stressful times, the pressure is on to move our inventory,” stated David Shulman on August 30, head of UBS’s fixed income distribution “I am aware that JPM and Citi are on all â??alertâ?? in the same fashion with their retail groups.”

Greed knows no boundaries. These banks / brokerages placed shareholder value above client value. Now they have neither. They transferred their illiquid or worthless bad investments on their clients, keeping their share prices higher. As they say…”Payback is a bitch”.
Next week we will see more banks “offering to repurchase” their securities from their unsuspecting customers. Watch what happens to Merrill and Goldman this week. What does this means to investors? NEVER TRUST ANYTHING YOUR BANKER SAYS. NEVER DEAL WITH YOUR BANKER VERBALLY. EVERYTHING MUST BE IN WRITING. VERIFY EVERYTHING. DO NOT ALLOW YOUR BANKER / BROKERAGE TO “PUT” YOU IN ANYTHING. TAKE CONTROL OF YOUR OWN PORTFOLIO.

This is your opportunity to discover how Shadowtraders can help you learn to take control of your own finances.  You’ll know more than any brokerage or banker.  Do a Shadowtraders webinar this week and see for yourself.

Stock charts

Thursday, August 14th, 2008

If you don’t ShadowTrade, this is what you end up with:


Dear Investor…

Wednesday, August 13th, 2008

Link here. I suspect that a lot of letters will be going out that look like this one (but sadly, not as honest). Use ShadowTraders and avoid getting a ‘Dear John Investor’ letter.

ACME Systematic Leveraged Macro Momentum Fund LP

 321 Overprice Street

Greenwich, CT 00573

Dear Investor,

This letter is to inform you that the wheels have come off of the proverbial wagon at ACME Systematic Leveraged Macro Momentum Fund LP, and that the same awesome thematic portfolio that made you feel (in the first half-year) as if you’d become very rich in comparison to those sucking wind on their leveraged MBS portfolios or Japanese Small-Cap Value Funds, has, quite literally, spontaneously combusted in our faces. (more…)

Countrywide/BofA Merger Impacts Calif Defaults

Wednesday, August 13th, 2008

Full story here. The short synopsis is that Notice of Defaults (NODs) are down in California, but 91% of that downturn can be attributed to Countrywide not posting them. Is it not a bad statistic if I fail to report it? One paragraph was of particular concern:

“Despite lenderâ??s best efforts to discount, third-party buyers largely yet remain on the sidelines. Foreclosures hit a total of 28,795 properties during July; of those, 27,817 received no bid higher than the lenderâ??s opening bid, meaning REO inventories are mushrooming throughout key areas in the state.” (more…)