29 February 2008

The Explosive US Monetary Inflation

MONEY is primarily a medium of exchange, and a proxy store of value.

WEALTH is an asset based store of value.

You convert wealth to money in order to exchange it for some other good, some other asset, whether it is to be saved (durable) or consumed (non-durable). If you exchange assets without using a medium of exchange, that is called barter.

Many confuse the destruction of wealth with the destruction of money.

If the amount of money grows faster than the net amount of wealth added by non-monetary methods such as productive effort that is inflation. This is not to be confused by price inflation caused by asset specific imbalances in supply and demand.

Some items, such as gold and silver, are both wealth and money, since their value is not narrowly contingent on time and place.

MZM is the best measure of US 'money' that the Federal Reserve provides. It is money in that it is readily available at par value, without time or penalty constraints, excepting inflation.

Still unclear? As they say, one picture is worth a 1000 words.

28 February 2008

Why Are We Allowing Unbridled Greed to Destroy Our Childrens' Future?

This started under the Clinton Administration, and reached its full flower under the Bush Administration. It was supported and enabled by those who turned a blind eye to go along to get along in the Federal Reserve and Congress. The heart of this darkness is Wall Street and the corrupt political system in which sacred duty walks the street for hire in the cloak of patriotism, fear-mongering, false piety, and a pathological apathy towards duty, honor and virtue. This is the shame of our generation.

Note: Gary J. Aguirre is the SEC employee who was fired over an abortive attempt to pursue the Pequod insider trading case.

By Facsimile or Electronic Mail
February 13,2008

Senator Christopher Dodd
United States Senate Committee on
Banking, Housing and urban Affairs
728 Hart Senate Office Building
Washington, D.C. 20510

Senator Richard C. Shelby
Ranking Member
United States Senate Committee on
Banking, Housing and urban Affairs
110 Hart Senate Office Building
Washington, DC 20510

Re: Hearing on the of State of the United States Economy and Financial Markets

Dear Chairman Dodd and Ranking Member Shelby:

As the current credit crisis unfolds, investors and the public must rely upon your Committee to uncover its causes and scope. Your hearing on Thursday, The State of the United States Economy and Financial Markets, offers an opportunity to question those regulators who are responsible for protecting the capital markets from this evolving crisis. I respectfully submit there are two key questions that penetrate to the core of this crisis:

1) Why did counterparty discipline fail?

2) Why did the SEC stop an investigation three years ago that could have averted the subprime crisis? (footnote l)

I will try to put these questions into sharper focus with the context below.

The myth of counter party discipline

In essence, the nation has two capital markets: one market is semi-transparent and semiregulated; the other market is opaque and unregulated.

The semi-transparent market appears on balance sheets. It is subject to SEC regulations requiring disclosure. It includes investment banks and public companies that regularly file SEC forms disclosing their financial operations.

The opaque market has its own players and its own playing field. The players are hedge funds -also unregulated and opaque- and the proprietary desks of investments banks. As investment banks own more and more hedge funds, their players also become unregulated and opaque. The playing field is the over-the-counter derivatives and instruments, such as subprime debt, which are off the balance sheets.

The opaque market is experiencing geometric growth. The notional value of the derivative market has increased fivefold since 2003, from around $100 trillion to over $500 trillion. Likewise, hedge funds are having the same geometric growth in assets under management and in sheer numbers. The SEC predicts the assets under managements by hedge funds will grow from $2 trillion to $6 trillion by 2015. Hedge funds currently dominate the trading markets around the world-with only $2 trillion in assets. It is hard to envision the extent to which they will control the markets when their assets grow to $6 trillion, all operating in the shadows.

Hedge funds love to play with the most dangerous forms of derivatives~credit default swaps (CDS). There are now $42 trillion in CDS. These guarantees differ little from gambling. The potential rewards for insider trading are nearly unlimited, as is the negative impact on the capital markets.

After the Great Crash, Congress enacted legislation designed to make our markets transparent. The same legislation created the Securities and Exchange Commission. As money flows from the regulated market to the unregulated market, we are now recreating the conditions that existed immediately before the Great Crash.

The investment banks and hedge funds have come up with a new principle for protecting the capital markets. It is called counterparty discipline. Translated, it means: "Trust us." The term is tossed around as if it were natural law in the financial markets, much like gravity in the physical world.

In reality, counterparty discipline is a slogan, a myth, which has been sold to regulators by investment banks and hedge funds so they can operate in the shadows without regulation. We hear about counterparty discipline during Congressional hearings from those who wish the opaque, unregulated markets to grow. During financial crises, the same folks talk less about "counterparty discipline." Indeed, we are only told that it "eroded" without explanation why.

In fact, the theory of counterparty discipline reverses reality. When the markets are moving upward, optimism is high. It is a cliche, but nevertheless true, that upward trading markets are driven by greed. All of our major investment banks, with the possible exception of Goldman Sachs, failed to detect that subprime debt was a time bomb. Why did counterparty discipline fail the investment banks in their moment of need? I respectfully submit this question should be posed to the three regulators who are testifying on Thursday.

Where is the SEC?

Over the past two months, the Wall Street journal, the New York Times, Reuters, CNBC and Forbes have all asked a single question: where was the SEC on subprime debt? (footnote 2)

Significantly, three rears ago, the SEC was conducting an investigation that could have averted the subprime crisis. The investigation focused on Bear Stearns' evaluation of subprime debt, the core issue in the current crisis. The investigation reached a point where Bear Stearns was told it would be charged.

Then, for no known reason, the investigation was switched off. A recent Wall Street Journal article suggests that the effective prosecution of the Bear Steams case might have averted the subprime crises.4

The Bear Steams investigation is stunningly similar to the SEC investigation of Pequot Capital Management which I headed. Like Bear Steams, the Pequot investigation appeared to be advancing towards a filing. Like Bear Steams, senior SEC management decided to halt the investigation. Like Bear Steams, the SEC was later forced to focus on the underlying abuse, but only after that abuse grabbed media attention. In Bear Steams, the underlying abuse was overvalued subprime debt. In Pequot, the underlying abuse was widespread insider trading by hedge funds.

We know why the Pequot investigation was stopped. According to a joint report by the Senate Judiciary and Finance Committees, a major investment bank, Morgan Stanley, retained an influential attorney who intervened at the highest level of the Division of Enforcement to stop the investigation. The two Senate committees concluded that senior SEC officials gave preferential treatment to a member of Wall Street's elite and then fired the lead investigator (me) when he questioned that decision. None of the senior SEC officials who derailed the Pequot investigation were ever disciplined. Was the Bear Steams investigation stopped in a similar way?
Did another influential attorney, hired by Bear Steams, place a call to a high-level official at the SEC?

Your Committee has oversight jurisdiction of the SEC. The SEC's mission is to protect the capital markets and investors. It had a chance to protect the capital markets from the current subprime crisis three years ago, when it was investigating whether Bear Steams overvalued subprime debt. Why did the SEC call a halt to the Bear Steams investigation? Who made that decision?


[Gary J. Aguirre]

CC: Members of the U.S. Senate Committee on Banking, Housing and urban Affairs.

1 Michael Siconolfi, Did Authorities Miss a Chance To Ease Crunch?--SEC, Spitzer Probed Bear CDO Pricing in '05, Before Backing Away, Wall S1.J., Dec. 10, 2007, at C1.

2 Id.; Gretchen Morgenson, 0 Wise Bank, What Do We Do? (No Fibbing Now), N. Y. times,
January 27, 2008, at 1; Karey Wutkowski, SEC Chief Awaits Final Senate Report on Pequot, Reuters News, February 9, 2007; http://www.cnbc.com/id/22706231/site/14081545/; and Liz Moyer, Credit Crisis: Where Was The SEC? Forbes.com, Feb. 6,2008. Available at http://www.forbes.com/2008/02/05/ sec-cmos-banking-biz-wall-cx 1m 0206sec.html.

3 Michael Siconolfi, Did Authorities Miss a Chance To Ease Crunch?--SEC, Spitzer Probed Bear CDO Pricing in '05, Before Backing Away, Wall S1.J., Dec. 10,2007, at Cl.

4 Id.

5 Senate Report No. 110-28 (2007), at 684 Available at http://finance.senate.gov/sitepages/leg/LEG%202007 /Leg%20 110%20080307%20SEC.pdf.

Copy of Gary J. Aguirre's Original Letter

SP 500 Tops in Recessions: 2000-3 compared to 2007-9

In each case the 20 week moving average curls under the 50 week moving average.
Although we generally use the 26 week and 52 week moving averages the principle
remains the same. We have seen a very significant crossover and a probable top
marking the start of what looks to be an economic recession.

Lets watch its progress.

(and a tip of the hat to Elvis_Knows for the nicely visual graphics. Thank you, thank you very much.)

26 February 2008

Bull Market Correction, or a New Bear Market?

This is the question that every trader must ask themselves, and to do this they must consult the charts. Relying on emotions, or other so-called indicators like magazine covers, and how many posters on a single chat board are negative or positive are the type of indicators that are best performing after the fact in our memories, because we remember the hits and forget the misses.

Here is what the SP500 chart says. There are some divergences among the various indices, but lets use the SP as a bellwether for now because of its heavy concentration of financial stocks. Typically we use the Russell 2000 to lead, and the Nas Comp and SP 500 to confirm. The Dow Jones is for tourists.

It is absolutely essential to keep in mind that the Fed and Treasury are going to try and print their way out of their banking dilemma. This will likely cause inflation, and a bubble in some assets. The stock market is one likely place.

If the bubble *sticks* we may see a high between now and the end of April. At that point, we'll know if the reflation is sticking in the real economy. If not the stock market may retest the lows. If the Fed does a good enough job of blowing another financial asset bubble, we may see a particularly interesting autumn in the markets this year. Stay flexible, and let's see what happens.

"Everything was not fine in 1929 with the American economy. It was showing ominous signs of trouble. Steel production was declining. The construction industry was sluggish. Car sales dropped. Customers were getting harder to find. And because of easy credit, many people were deeply in debt. Large sections of the population were poor and getting poorer.

Just as Wall Street had reflected a steady growth in the economy throughout most of the 20s, it would seem that now the market should reflect the economic slowdown. Instead, it soared to record heights. Stock prices no longer had anything to do with company profits, the economy or anything else. The speculative boom had acquired a momentum of its own."

And after the hubris peaked came the bonfire of the vanities, the dark decade of the 1930s, and the madness that shatters nations.

And Now the Ghosts of Enron Past - VIE's

Goldman, Lehman May Not Have Dodged Credit Crisis
By Mark Pittman

Feb. 26 (Bloomberg) -- Even Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. may find they haven't dodged the credit crisis.

The new source of potential losses: so-called variable interest entities that allow financial firms to keep assets such as subprime-mortgage securities off their balance sheets. VIEs may contribute to another $88 billion in losses for banks roiled by the collapse of the housing market, according to bond research firm CreditSights Inc. Goldman, which hasn't had any of the industry's $163 billion in writedowns, said last month it may incur as much as $11.1 billion of losses from the instruments.

The potential for a fire-sale of the assets that would bring another round of charges has ``always been our greatest fear,'' said Gregory Peters, head of credit strategy at New York-based Morgan Stanley, the second-biggest securities firm behind Goldman in terms of market value.

VIEs, known as special purpose vehicles before Enron Corp.'s collapse in 2001, finance themselves by selling short-term debt backed by securities, some of which are insured against default.

Now that Ambac Financial Group Inc. and other guarantors have started to lose their AAA financial-strength ratings, Wall Street firms may be forced to return those assets to their books, recording the declining value as losses. MBIA Inc., the biggest insurer, said yesterday it plans to separate its municipal and asset-backed businesses, a move Peters said would likely result in a lower credit rating for the types of assets owned by VIEs.

`Significant Consequences'

Wall Street's writedowns stem from a surge in mortgage delinquencies among homeowners with the riskiest subprime-credit histories. The industry's VIEs, also known as conduits, had $784 billion in commercial paper outstanding as of last week, according to Moody's Investors Service and the Federal Reserve.

``There's a big number at work here and it will have significant consequences,'' said J. Paul Forrester, the Chicago- based head of the CDO practice at law firm Mayer Brown. ``The great fear is that a combination of subprime CDOs, SIVs and conduits result in a flood of assets into an already-stressed market and there's a price collapse.''

CreditSights has one of the highest projections for additional losses. Moody's says the fallout from VIEs, collateralized debt obligations, and other deteriorating assets may run to $30 billion. CDOS are packages of debt sliced into pieces with varying ratings.

`Lightning Rod'

One type of VIE that's already been forced to unwind or seek bank financing is the structured investment vehicle, or SIV. Like SIVs, VIEs often issue commercial paper to finance themselves and may have multiple outside owners that share in the profits and losses. Because banks agree to back VIEs with lines of credit, they have to buy commercial paper or notes when no one else will.

Ambac, the world's second-biggest bond insurer, and two smaller competitors lost a AAA rating from at least one of the three major ratings companies in recent months. Standard & Poor's yesterday affirmed the AAA ranking of MBIA, the largest ``monoline,'' though it said the outlook is ``negative.'' MBIA yesterday eliminated its quarterly dividend and said it won't write new guarantees on asset-backed securities for six months.

The more widespread the downgrades, the more likely the assets in the VIEs will be cut. Some buyers of the debt demand the highest ratings, giving banks a vested interest in helping the insurers salvage their ratings.

Ambac Financing

New York-based Ambac may get $3 billion in new capital with the help of Citigroup Inc. and Dresdner Bank AG as early as this week, the Wall Street Journal reported yesterday. MBIA raised money by selling common shares and warrants to private-equity firm Warburg Pincus LLC and issuing $1 billion of surplus notes.

``The lightning rod of the monoline fix is so important to so many banks,'' said Thomas Priore, chief executive officer of New York-based Institutional Credit Partners LLC, which manages $12 billion in CDOs.

Accounting rules allow financial firms to keep VIEs off their balance sheets as long as they're not the ones that stand to gain or lose the most from the entity's activities. A bank would also have to account for its portion of a VIE if prices for the debt owned by the fund fall too far or if the bank is forced to provide financing.

Goldman, Lehman

Goldman, the most profitable Wall Street firm, and Lehman, the biggest commercial-paper dealer, have avoided much of the pain so far.

Goldman, which earned a record $11.6 billion in the year ended in November 2007, said it avoided writedowns by setting up trades that would profit from a weaker housing market. Now the threat is $18.9 billion of CDOs in VIEs, the firm said in a regulatory filing on Jan. 29. Goldman spokesman Michael DuVally declined to comment.
Merrill Lynch & Co. analyst Guy Moszkowski today cut his estimate for Goldman's first-quarter earnings for the second time this month, citing growing losses from assets outside residential mortgages.

Lehman, which wrote down the net value of subprime securities by $1.5 billion, guaranteed $6.1 billion of investors' money in VIEs and $1.4 billion of clients' secured financing as of Nov. 30, according to a filing also made on Jan. 29.

``We believe our actual risk to be limited because our obligations are collateralized by the VIE's assets and contain significant constraints,'' Lehman said in the filing. Spokeswoman Kerrie Cohen wouldn't elaborate.

Citigroup Losses

Citigroup, which has incurred $22.1 billion in losses from the subprime crisis, has $320 billion in ``significant unconsolidated VIEs,'' according to a Feb. 22 filing by the New York-based bank. New York-based Merrill Lynch, which recorded $24.5 billion in subprime writedowns, has $22.6 billion in VIEs, according to CreditSights.

Merrill spokeswoman Jessica Oppenheim declined to comment, as did Citigroup's Danielle Romero-Apsilos.

The securities in the VIEs may be worth as little as 27 cents on the dollar once they're put back on balance sheets, according to David Hendler, an analyst at New York-based CreditSights. Hendler based his estimate on the recent sale of $800 million of bonds by E*Trade Financial Corp.

Predictions for losses vary widely because banks aren't required to specify the type of assets being held in the VIEs or how much they are worth, said Tanya Azarchs, managing director for financial institutions at S&P.

``The disclosure on VIEs is hopeless,'' Azarchs said. ``You have no idea of the structure or how that structure works. Until you know that you don't know anything. It's like every day you come into the office and another alphabet soup has run off the rails.''

To contact the reporter on this story: Mark Pittman in New York at mpittman@bloomberg.net .

Last Updated: February 26, 2008 13:11 EST

Bernanke, Greenspan at Fault as U.S. Faces Slump

While Joe Stiglitz is right in much of his analysis, his prescription now is for the Fed to print money more aggressively. How is that different from what he criticizes Greenspan from having done?

We appreciate the glancing blow he strikes at US fiscal irresponsibility for taking on a 3 trillion dollar war with Iraq, trying to hide the cost, while cutting taxes for the wealthiest few. But his prescription for dealing with it by triggering inflation to prevent the recession is just as irresponsible, unless it is accompanied by some serious reform of the financial system and fiscal priorities.

He damns Greenspan for looking the other way while the Housing Bubble inflated, but where is Bernanke now supposed to look when he creates another bubble by printing money?

As you may recall, the moment in history that Greenspan turned his head and looked the other way was after a private visit paid to him by then Treasury Secretary Robert Rubin, about the time Greenspan made his famous 'irrational exuberance' speech. He then turned around and opened the spigots, and fueled the tech bubble in response to the Asian monetary and Russian default crises, and used the Y2K excuse for a second round.

It is for this that we called Greenspan 'the worst Federal Reserve chairman ever.' And he was coupled with one of the worst US presidents ever, a deadly combination. But we cannot help but think that they both are just pawns, as neither distinguished themselves in anything before they were given positions of trust, power, and stewardship, and willfully betrayed them.

The price of oil is rising because the US has triggered a worldwide bubble by inflating the world's reserve currency, and doing so for too long, with too much hubris. And like the subprime mortgage scandal, there were many enablers, and people who went along with it as an opportunity to gain personal advantages. And far too many who knew better but kept quiet, under the maxim 'go along to get along.'

Stiglitz himself put his finger on part of the problem in his piece, What I Learned at the World Economic Crisis, in The New Republic in April 17, 2000:

But bad economics was only a symptom of the real problem: secrecy. Smart people are more likely to do stupid things when they close themselves off from outside criticism and advice. If there's one thing I've learned in government, it's that openness is most essential in those realms where expertise seems to matter most.

Hey Joe, when are you going to speak up about the serial off balance sheet frauds perpetrated by the banks, who spent YEARS and many millions of dollars to get Glass-Steagall overturned? When are you going to speak about the manipulation of economic statistics and markets to mask what Greenspan turned away from? When are you going to talk about the outrageous lack of transparency being used to enrich the few again at the expense of the many as we speak today?

First they came for the workers, through outsourcing and globalization. Now they are going to be coming after the elderly and disabled, having squandered the monies they paid over many years into Social Security. Is this all part of a final overturning of the New Deal, and a return to Victorian Anglo-American oligarchy? Be careful how quickly you react, because a lot of would-be 'lord and ladies' are in reality just part of the hoi polloi.

We are in for one rough time. Greenspan, in his book and his words, is trying to rain on Bernanke's parade while absolving himself. Stiglitz is raining on both, while prescribing the 'hair of the dog that has bitten us' to cure the credit boom hangover that the US financial system has served up for the world. Well, we have a German shepherd sized dog that has bitten a chunk out of our hides, and we're still so drunk we have not quite realized it yet. And Joe doesn't help, except to trot out the same old snake oil.

Bernanke, Greenspan at Fault as U.S. Faces Slump, Stiglitz Says
By Mark Barton and Ben Sills

Feb. 26 (Bloomberg) -- Joseph Stiglitz, a Nobel-prize winning economist, said successive Federal Reserve chairmen have left the U.S. economy facing a ``very significant'' slowdown.

Current Fed chief Ben S. Bernanke was too slow to cut interest rates as the U.S. real-estate market deteriorated, while his predecessor, Alan Greenspan, ``actively looked the other way'' as the housing market inflated, Stiglitz said in a Bloomberg Television interview today in London.

The spillover from the biggest U.S. housing slump in 25 years, turmoil in financial markets and higher energy prices are curbing growth in the world's biggest economy. The financial- services industry is curtailing credit and conserving capital.

Greenspan ``is right that this downturn is going to be the worst downturn in a quarter century, but he's largely to blame,'' Stiglitz said. ``It's not just that he was asleep at the wheel, he actively looked the other way'' by dismissing the housing-price appreciation as ``froth.'' [Where was Stiglitz's voice when he was doing it? - Jesse]

Following mounting losses on past loans, banks have already taken writedowns of $163 billion since the beginning of 2007. President George W. Bush signed a $168 billion stimulus package that will deliver tax rebates to more than 100 million households.

Bernanke cut Fed interest rates twice last month, including an emergency reduction of 75 basis points between meetings, in a bid to prop up growth as the financial writedowns and the prospect of a further housing decline saw U.S. stocks slump. The S&P 500 index is down 6.6 percent this year.

`Too Late'

``Clearly they acted too late,'' Stiglitz said. ``The dramatic lowering of the main interest rate by 75 basis points was a panic not a prudent measure.''

The $3 trillion cost of the Iraq war, which diverted the country's resources from investment in economic productivity and sent the budget deficit higher, will continue to hold back growth in the U.S., Stiglitz said.

European monetary-policy makers may also be under- estimating the risks to economic growth, Stiglitz said. The European Central Bank's mandate, which sets price stability as the sole objective, is ``flawed'' because it prevents ECB President Jean-Claude Trichet from supporting job creation.

"He should not be focusing so much on inflation especially when so much of it is imported,'' Stiglitz said. ``Higher interest rates won't solve the problem of higher oil prices.'' [this guy is a "Nobel prize winning economist" and he says that? - J]

To contact the reporters on this story: Mark Barton in London at barton1@bloomberg.net ; Ben Sills in Madrid at bsills@bloomberg.net .

Last Updated: February 26, 2008 07:02 EST

FDIC Prepares as Bank Failures Loom - Wall Street Journal

FDIC to Add Staff as Bank Failures Loom
By Damian Paletta
Wall Street Journal

WASHINGTON -- The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen.

The FDIC is looking to bring back 25 retirees from its division of resolutions and receiverships. Many of these agency veterans likely worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.

FDIC spokesman Andrew Gray said the agency was looking to bulk up "for preparedness purposes." The division now has 223 employees, mostly based in Dallas.

The agency, which insures accounts at more than 8,000 financial institutions, is also seeking to hire an outside firm that would help manage mortgages and other assets at insolvent banks, according to a newspaper advertisement.

FDIC Chairman Sheila Bair, Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Reich have warned of a pickup in bank failures. Last week, Mr. Reich reported that the thrift industry lost a record $5.2 billion in the fourth quarter.

"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.

The FDIC was created by Congress in the 1930s after a series of bank runs during the Great Depression. At the end of 2007, it had $52.4 billion in its fund that backstops the nation's insured deposits.

FDIC to Add Staff as Bank Failures Loom - WSJ

25 February 2008

Revisiting Our Gold Forecast from May 2007

"We were staring into an abyss as the price
of gold rose in September,1999."

Sir Edward George, Bank of England

The forecast we put out for Continuous Contract Gold in May 4, 2007
projected we would hit a high of 1,050 per ounce and end the year
roughly at 1,000 per ounce.

Here is the detailed forecast as we put it out almost a year ago.

Here is how things have actually turned out.

We are working on a new forecast and
hope to put it out here sometime in early March.

Theme for 2008: Back to the Abyss

Visa IPO Will Make Some Market Waves

The words generational top come to mind.

Watch these jokers try to prop the markets until they can get this one out the door like they did with AT&T Wireless.

Visa's IPO Could Be Largest In U.S. History
Company Aims to Sell As Much as $17 Billion in Stock
February 25, 2008 7:22 a.m.

Credit-card processing giant Visa Inc. released the proposed terms of its long-expected initial public offering Monday, saying it plans to sell as much as $17 billion in stock, which would make it the biggest IPO in U.S. history.

The industry leader proposed to sell 406 million shares between $37 and $42 each. At the proposed price range, the Visa offering would easily trump AT&T Wireless Group's $10.62 billion IPO in 2000. The IPO's underwriters will have the option of buying an additional 40.6 million shares...

In 2006, Visa recorded 44 billion transactions, compared with 23.4 billion for MasterCard Inc., its largest competitor. The offering represents just more than half of Visa's 808 million shares outstanding. Visa has said the rest will be held by the San Francisco firm's member banks.

Visa made its initial IPO filing in June with the SEC, beginning the process from a private, member-owned association for financial institutions to a publicly held firm following the path of smaller rival MasterCard. MasterCard has been a high-flyer since going public in 2006, with its shares quintupling since then. Both firms aren't as tethered to consumer spending as credit-card issuers like banks because as an electronic-transaction processor it still makes money as more purchases are made with plastic instead of cash or checks.

Visa involves the mergers of Visa Canada, Visa USA and Visa International. Visa Europe will remain a bank-owned membership association and licensee of Visa Inc. The company said it plans to trade on the New York Stock Exchange under the symbol "V." The company hasn't said when it plans to make the offering, but today's release implies it could come soon.

At the midpoint of the proposed range, Visa sees raising nearly $15.6 billion, or $17.1 billion if the underwriters exercise their option to purchase all additional shares made available. The company said $3 billion of the proceeds would be put into an escrow account to pay legal settlement, with another $10.3 billion used to redeem stock held by its member banks. The rest would be for general corporate purposes.

The Principal Shareholders

J. P. Morgan Chase (JPM) 23.3%
Bank of America (BAC) 11.5%
National City (NCC) 8.0%
Citigroup (C) 5.5%
US Bancorp (USB) 5.1%
Wells Fargo (WFC) 5.1%
VISA Europe Ltd. 19.6%

The Underwriters

Class A Common Stock

J.P. Morgan Securities Inc.
Goldman, Sachs & Co.
Banc of America Securities LLC
Citigroup Global Markets Inc.
HSBC Securities (USA) Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
UBS Securities LLC
Wachovia Capital Markets, LLC

The VISA Prospectus filed with the SEC

The VISA Prospectus from EDGAR Online

24 February 2008

Shoppers Warned Bigger Food Bills on the Way

Shoppers Warned Bigger Bills on Way
By Javier Blas

Published: February 24 2008 22:02

When William Lapp, of US-based consultancy Advanced Economic Solutions, took the podium at the annual US Department of Agriculture conference, the sentiment was already bullish for agricultural commodities boosted by demand from the biofuels industry and emerging countries.

He added a twist – that rising agricultural raw material prices would translate this year into sharply higher food inflation.

“I hope you enjoy your meal,” Mr Lapp told delegates during a luncheon. “It is the cheapest one you are going to have at this forum for a while.”

His warning that a strong wave of food inflation is heading towards the world economy was met by nods from agriculture traders, food industry executives and western’s government officials at the USDA’s annual Agricultural Outlook Forum.

Larry Pope, chief executive of Smithfield Foods, the largest US pork processor, warned delegates of a wave of “real food inflation” just at the time central banks were under pressure to cut interest rates.

“I think we need to tell the American consumer that [prices] are going up,” he said. “We’re seeing cost increases that we’ve never seen in our business.”

The comments highlighted one of the conference’s main concerns – that rising agricultural prices have reached a stage at which the impact will be felt not only on fresh food but will also filter through the supply chain and raise the cost of processed food.

Tom Knutzen, chief executive of Danisco, one of the world’s largest ingredients companies, said rising vegetable oil costs made it more expensive to produce preservatives, colourings and flavourings.

“Our products are based on vegetable oil. “Our input cost has gone up so we are increasing prices,” he said in an interview in Brussels. He added that preservatives, colourings and flavourings made up only 1-2 per cent of the cost of food but there would be a ripple effect as they were present in almost all the food sold worldwide.

US agriculture officials forecast that food inflation will rise this year at an annual rate of 3-4 per cent, warning that the risks were skewed to the upside. Last year, food inflation rose 4 per cent, the highest annual rate since 1990.

Joseph Glauber, the USDA’s chief economist, said in an interview that until now some companies had absorbed the rise in commodities prices, but that trend was about to change.

He said that wheat prices had previously moved from $3 to $5 a bushel without significant pain for consumers. “But now the wheat price has jumped to nearly $20 a bushel. These large increases will show up [in consumer prices].”

Some people hope a slowdown in the US or global economy would push down agricultural commodities prices. But Mr Glauber said that would have a limited impact on agriculture commodities prices. “I am more concerned about higher prices than lower prices.”

However, Simon Johnson, chief economist at the International Monetary Fund, said in an interview that for most agricultural commodities and metal markets the global slowdown would push prices down.

“The commodities market believes in the decoupling of developing countries’ growth,” Mr Johnson said. “The IMF does not believe in decoupling to that extent.”

But even if commodities prices do slow down, other forces could still push consumer prices higher, food industry executives said.

Companies until now have moderated consumer price increases thanks to large inventories and financial hedges in the commodities market futures. But during the course of this year those mitigating factors would vanish, executives said.

“The final result will be higher prices,” Mr Lapp said. The global economy is “at the beginning of a period in which consumer will face higher food prices”.

Additional reporting by Andy Bounds in Brussels

Shoppers Warned of Bigger Food Bills - Financial Times

Commercial Real Estate Feels a Tremor

The first sense we had that there would be real trouble in the housing market was back in 2006 when a friend in the financial business was liquidating some companies with significant holdings in condominiums and housing developments. He was surprised that in a multiple set of geographic regions residential real estate had suddenly gone soft, and whereas deals could have been made easily before, there was a sudden dearth of buyers... at any price north of sixty cents on the dollar.

If you liked the housing bubble bust so far, the commercial real estate market is probably almost as overbuilt and overpriced, but is just starting to show the tremors ahead of the rollover. It might get some momentum as the recession in the US deepens.

You can track the commercial real estate CMBX bond indices here at Markit.

As an alternative viewpoint on the recession in the United States, Mr. Larry Summers thinks the recession won't be deep or prolonged, as stated in The Financial Times today Feb 24:

"The American economic outlook remains highly uncertain. But macro­economic policy is now properly aligned, as the economy will benefit over the next several quarters from fiscal and monetary stimulus. To the extent conditions warrant and inflation risks permit, monetary and fiscal policy are appropriately poised to provide further stimulus.
Policy towards America’s failing housing sector is in a far less satisfactory state. All honest analysts accept that policies adopted so far, such as the “teaser freezer” limits on resetting mortgage interest rates and increased federal support for mortgage lending, have had only a marginal impact on what may be the most serious crisis in housing finance since the Depression.

It appears house prices are down by 5-10 per cent from their peak, with derivatives markets predicting further declines of about 20 per cent. Price falls of this magnitude are likely to mean more than 10m would have negative equity in their homes and more than 2m foreclosures would take place over the next two years."

What struck us most about this was that US Housing market takes a ten percent correction in a generational bull market, and the economists are ready to crank up the New Deal, and start nationalizing banks. Uh, aren't resilient markets supposed to be able to accept the occasional ten percent correction in stride as a normal mechanism in a free market? Or is it that when you have propped, papered, and bubbled a Potemkin economy for so many years, an ordinary correction shakes its flimsy structure to the near limit of collapse?

Or is it that subrprime and CDOs are just the tip of the iceberg, a symptom of a much deeper problem. Perhaps they have taken a look at the dominos a little further downstream like the Credit Default Swaps multi trillion CDS derivatives at a ratio of 40+ to 1 against actual defaults covered, and trembled in despair.

Commercial property values in for steep drop, says loan liquidator
Banks starting to unload distressed real estate loans; some sellers taking 50 cents on the dollar

By Frank Byrt
February 22, 2008

In what may well be a sign of things to come, Mission Capital Advisors said it is accepting bids for a $131.2 million portfolio of non-performing loans secured by commercial mortgages foreclosed on by a Midwestern bank.

David Tobin, a principal at Mission Capital, which manages the sale of troubled mortgage loan portfolios and real estate assets for lenders, said that “with the market conditions as they are, we expect a significant increase in similar offerings throughout the year.”

“The pace of offerings has picked up dramatically over the past year,” which has been one of his firm’s busiest, he added. “We did $5 billion of debt sales last year, all of it seasoned performing, underperforming, or non-performing [loans].”

Mr. Tobin noted that “even the big investment banks are having trouble placing these [types of] loans, so we’re working twice as hard this year.”

More ominously, he predicted commercial property values are heading for a steep fall due to the rising tide of troubled portfolio sales by banks, as they move to get non-performing assets off their books.

It’s tough for banks to determine mark-to-market prices because commercial-loan backed packages being resold right now have to go through a price discovery process, Mr. Tobin said. Packages whose chief underlying assets are residential mortgages are getting bids of about 50 cents to 60 cents on the dollar, down from about 90 cents in late 2006 and early 2007.

The latest package of loans from the Midwestern bank, which Mission is putting up for bid in March, is secured by various commercial and residential real estate in Western Florida, including non-performing loans secured by various types of commercial mortgages and properties. Mission Capital is managing the sale in a sealed bid process, soliciting bids from prospective bidders for the purchase of individual loan pools, any combination of loan pools or the entire portfolio.

With bank lending drying up, commercial borrowers with older loans coming due are now also having trouble lining up refinancing. Some older loans are ending up being sold within the distressed packages. Eventually, Mr. Tobin believes the declines in the commercial real estate market could mimic those being registered in the residential market now.

“The delinquency trend is obviously increasing,” he said. “But when a loan out for 10 years can’t get refinanced, that tells you we’re giving back a lot of the gains of the past several years.”

Monetize the Bad Debt, Let the Public Pay

Let the government buy the bad mortgages. Its too complicated to try and fix it. Just save the homeowners.

As predicted, this is how they are going to wrap this one up for your consumption. Save the homeowners. Bring back The New Deal. Its a complex problem. The solution is so effiiecent and inexpensive compared to the alternatives. Many economists are already flocking to it as a human, practical, and much cheaper solution than allowing any banks to suffer losses.

The problem is that it pegs the financial losses to all holders of US dollars in the most regressive and unjust of all taxes, inflation.

And it fixes nothing, inviting the banks to do it all over again, from the S&L Crisis, to Enron, to IPO bubble, to Subprime and CDO fraud.

This isn't the New Deal. This is the Raw Deal for the public and the Sweetheart Deal for the financial industry.

The only way to resolve this is that any government intervention to resolve this must include:

  1. Glass-Steagall restrictions on ALL banks doing business in the US including multinationals.

  2. A significant set of Congressional hearings and the appointment of a special prosecutor assigned to investigate, with FBI support, the pervasive frauds in the US financial industry from Enron to Subprime, with special attention to RICO statutes and individuals as well as corporations.

  3. A return to the concept of regional and local banks through a reinstatement of laws limiting bank ownership across state lines

  4. A national usury ceiling for all interest rates and fees on all debt, both revolving and non-revolving, to prevent banks from perpetuating predatory interest rate schemes based on extending individual state laws.

February 24, 2008
Economic View
NY Times

From the New Deal, a Way Out of a Mess

THE question of the day seems to be this: Are we in, or heading for, a recession? But so much attention is focused on that question that we may be losing sight of an even greater danger: the possibility that powerful headwinds may prevent a strong recovery from any slowdown.

Most of the potential headwinds stem from the housing slump and related financial crises that began — but, unfortunately, did not end — with the subprime mortgage debacle. Wounded financial markets are supposed to cure themselves: asset prices fall, bargain hunters rush in and markets return to normal. But so far, that doesn't seem to be happening much. Instead, house prices keep dropping, the mortgage-foreclosure problem grows and new strains in the financial system keep popping up like a not-very-funny version of Whack-a-Mole.

While the problems are multifaceted, I have several reasons for focusing on just one aspect of the mess: the potential tsunami of home foreclosures. First, it strikes home, literally. Foreclosures throw families — some of whom were victims of deception — into the streets. They erode home values, damage neighborhoods and reduce the values of other properties, thereby intensifying the decline in housing prices that underlies many of our current problems. And they might even cut into consumer spending, which would really throw us into recession.

A second reason is that reducing the wave of foreclosures would mitigate the closely related financial crises in home mortgages and the alphabet soup of financial creations based on them (M.B.S., S.I.V.'s, C.D.O.'s, etc.). If those markets perked up, other beleaguered credit markets probably would, too.

A third reason for focusing on foreclosures is that we've seen this film before. During the Depression, President Franklin D. Roosevelt and Congress dealt with huge impending foreclosures by creating the Home Owners' Loan Corporation. Now, a small but growing group of academics and public figures, including Senator Christopher J. Dodd, Democrat of Connecticut, is calling for the federal government to bring back something like the HOLC. Count me in.

The HOLC was established in June 1933 to help distressed families avert foreclosures by replacing mortgages that were in or near default with new ones that homeowners could afford. It did so by buying old mortgages from banks — most of which were delighted to trade them in for safe government bonds — and then issuing new loans to homeowners. The HOLC financed itself by borrowing from capital markets and the Treasury.

The scale of the operation was impressive. Within two years, the HOLC received about 1.9 million applications from distressed homeowners and granted just over a million new mortgages. (Adjusting only for population growth, the corresponding mortgage figure today would be almost 2.5 million.) Nearly one of every five mortgages in America became owned by the HOLC. Its total lending over its lifetime amounted to $3.5 billion — a colossal sum equal to 5 percent of a year's gross domestic product at the time. (The corresponding figure today would be about $750 billion.)

As a public corporation chartered for a public purpose, the HOLC was a patient and even lenient lender. It tried to keep delinquent borrowers on track with debt counseling, budgeting help and even family meetings. But times were tough in the 1930s, and nearly 20 percent of the HOLC's borrowers defaulted anyway. So the corporation eventually acquired ownership of about 200,000 houses, nearly all of which were sold by 1944. The HOLC closed its books in 1951, or 15 years after its last 1936 mortgage was paid off, with a small profit. It was a heavy lift, but the incredible HOLC lifted it.

Today's lift would be far lighter. And a good thing, too, because our government is far more timid and divided than Roosevelt's.

Contemporary mortgage finance is also vastly more complex. In the 1930s, banks knew all of their customers, and borrowers knew their banks. Today, most mortgages are securitized and sold to buyers who do not know the original borrowers. Then mortgage pools are sliced, diced and tranched into complex derivative instruments that no one understands — and that are owned by banks and funds all over the world.

But this complexity bolsters the case for government intervention rather than undermining it. After all, how do you renegotiate terms of a mortgage when the borrower and the lender don't even know each other's names? This is one reason so few delinquent mortgage loans have been renegotiated to date.

Details matter, so here are a few: First, any new HOLC should refinance only owner-occupied residences. Speculators can fend for themselves — or go into default. Similarly, second homes or vacation homes should be ineligible, as should very expensive real estate. (Precise limits would vary regionally.)

Third, mortgages obtained via misrepresentation by borrowers should be ineligible for HOLC refinancing, but cases of fraud or deception by the lender should be treated generously. Fourth, as the original HOLC found, not all bad mortgages can be turned into good ones. Where families simply can't afford to be owners, the new HOLC should not be asked to perform mortgage alchemy.

What about the operation's scale? Based on current estimates, such an institution might be asked to consider refinancing one million to two million mortgages — proportionately less than half the job of its predecessor, and maybe less than a quarter. If the average mortgage balance was $200,000, the new HOLC might need to borrow and lend as much as $200 billion to $400 billion. The midpoint, $300 billion, is one-seventh the size of Citigroup and would rank the new institution as the sixth-largest bank in the United States.

Given current low interest rates, a new HOLC could borrow cheaply and should find it easy to earn a two-percentage-point spread between borrowing and lending rates, for a gross profit of maybe $4 billion to $8 billion a year.

What about loan losses? A 10 percent loss rate, or $20 billion to $40 billion, spread over the life of the institution, seems incredibly pessimistic. (The original HOLC experienced a 9.6 percent loss rate during the Depression.) So the new HOLC seems likely to turn a profit, just as the old one did. But even if it loses a few billion, we must remember its public purpose: to help the economy recover, not to make a buck. By comparison, the new economic stimulus package has a price tag of $168 billion.

It is said that history never repeats itself. But sometimes there are sequels. Now is the time to re-establish the Incredible HOLC.

Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians

23 February 2008

Saving AMBAC, the Homeowners, or the Banks?

AMBAC had a long term business as insurers for state and municipal government bonds, which is apparently a lucrative and stable business even today. Indeed this is the part of the business Warren Buffett would like to take over. Its also the part of the business that Elliott Spitzer, governor of NY State, characterized as unnecessary extortion.

What IS a problem is that AMBAC and other monolines insured groups of bonds that were NOT local government bonds, but rather were these Collateralized Debt Obligations (CDOs) that were bundles of mortgages that were apparently misrated at high levels like AAA that did not adequately reflect their risk. That risk factor is now coming home to roost with a vengance, as large numbers of mortgagees start to default (estimate is now in the ten percent range). Its a mixed problem of poor credit lending criteria AND falling home values. Why pay a loan on an asset that is now worth much less than what is owed?

In order to get those AAA ratings, the banks contracted with AMBAC to insure them in the event of default, which is happening now. On a default, AMBAC is obliged to pay the principal and interest to the bondholders. What do you think would be happening if the bondholders were you all, the general public?

The government folks do not wish AMBAC to lose their own high credit ratings, because if this happens it will impact the municipal and state bond market negatively. Since most agree that so far defaults in this part of the business are no problem, and the business itself is healthy enough for hard-nosed capitalists like Warren Buffett to covet it and indeed offer to take it as it is, we probably can remove that concern from the table for the time being.

By the way, why don't the States and their associated municipalities just self-insure? Why isn't this covered by something similar to FDIC, but for states? The flaw in the current scheme is obvious. In the event of a black swan failure no small private corporation can possibly cover something as large as a state government in default. Some of the US states are like not-so-small countries. Its insurance that is only good when it isn't needed. Hence the 'extortion' definition by Spitzer.

It seems that the real heart of the problem is that AMBAC was being used as a "cover" by the banks which originated these bundles of mortgages to get their mispriced ratings. Now that the mortgages are failing and the banks are stuck with them, AMBAC cannot possibly pay, they cannot cover the debt. And the banks don't wish to mark these CDOs to market because they are probably at best worth 60 cents on the dollar, but are being held by the banks on balance at roughly par. That's a 40 percent haircut on enough debt to sink every bank involved in this situation (see list below). Indeed for all intents and purposes if marked to market these banks are now insolvent.

So, the banks will provide capital to AMBAC, which they will use to pay the principal and interest on the CDOs which is presumably much less than 40 percent and can be paid out over time BACK TO THE BANKS. Or, the banks can just rip up the insurance and let AMBAC off the hook for a piece of the company.

Does anyone else see the problem with this? What about the failing CDOs that are the core of the problem? Forget the insurance, because unless an uninvolved entity picks up the tab (Joe Q Public and the foreign government Sovereign Wealth Funds, etc.) its just a game of passing money around.

This bad debt will be covered by printing money, period. Its merely a question of who takes the hit for it in wealth erosion, and to what degree.

So why are the banks engaging in this charade? This looks like an attempt to extend the payouts on a vast Ponzi scheme gone bad that is starting to collapse, with no fresh capital being put in by the sucker. The banks have been caught with their pants down, and a UK style bailout such as we saw in Northern Rock is not palatable to the American Public, particularly in an election year. It would also catch the shareholders and management of the banks in a bad way.

And that's the real heart of this. Its to help the owners and shareholders of the banks. Pure and simple. It does not fix the problem. It gives them time to lay off their exposure to 'someone else.' The Treasury and the Fed (they are owned by these same banks as you may recall) support this because it gives them time to try and work out the real fix, by essentially printing money, but at a more gradual rate so as to not break the buck or the bond.

At the end of the day this is a Ponzi scheme that has failed. Our objection to the solutions as proposed is that while it does create a good by not triggering a destructive systemic failure in our financial system, it is being done in very opaque fashion which is permitting the same people who caused the problem to extricate themselves from the negative fallout, and not only shift it to the public, but to further enrich themselves by using their knowledge of the situation to make further profits through speculation in the equity, currency and bonds markets.

And to make matters MUCH worse, there is little doubt that having done this now several times, unless the situation changes the banks will invent a new scheme, and take us back to the same place again. From LTCM, to Enron, to the IPO bubble, to the Housing Bubble. Settlements and wristslaps do not work.

The only way to resolve this is that any government intervention to save 'homeowners' from foreclosure must:

  1. Glass-Steagall restrictions on ALL banks doing business in the US including multinationals.

  2. A significant set of Congressional hearings and the appointment of a special prosecutor assigned to investigate, with FBI support, the pervasive frauds in the US financial industry from Enron to Subprime.

  3. A return to the concept of regional and local banks through a reinstatement of laws limiting bank ownership across state lines

  4. A national usury ceiling for all interest rates and fees on all debt, both revolving and non-revolving, to prevent banks from perpetuating predatory interest rate schemes based individual state laws.

And a modest proposal from Bank of America from Tanta at CalculatedRisk: The Bank of America Bailout

"A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates."

And the news item from Marketwatch referenced above:

Banks may recapitalize Ambac to save AAA rating
Capital boost from counterparties may be simpler than splitting bond insurer
By Alistair Barr, MarketWatch
Last update: 6:43 p.m. EST Feb. 22, 2008

SAN FRANCISCO (MarketWatch) -- A group of eight banks that are major counterparties to Ambac Financial Group may recapitalize the struggling bond insurer in a bid to save its crucial AAA rating, two people familiar with the situation said Friday. The negotiations have progressed in recent days, the people said, on condition of anonymity.

The plan could be unveiled Monday or Tuesday, according to one of the people. But the other person said no firm timetable has been set. Both also noted the plan isn't a done deal.

Barclays PLC, BNP Paribas, Citigroup Inc., Royal Bank of Scotland Group, Societe Generale, UBS AG, Wachovia Corp., and Dresdner Bank, are the banks involved in the talks, the two people said. The group recently hired boutique bank Greenhill & Co. to help with the negotiations.

"We have a lot of alternatives. A capital raise has always been an option to stabilize the rating," said Vandana Sharma, a spokeswoman for Ambac in an interview. "We're trying to do the best by all constituents, including policy-holders, shareholders and counterparties." Sharma declined to comment on specific plans.

Bond insurers agree to pay interest and principal on debt in a timely manner in the event of default. The $2.4 trillion business relies on AAA ratings to win new business. But those top ratings are in jeopardy now because of concerns insurers like Ambac and MBIA will have to pay big claims from guarantees they sold on complex mortgage-related securities known as collateralized debt obligations (CDOs).

If the situation gets bad enough, regulators including New York State Insurance Superintendent Eric Dinallo are considering splitting bond insurers in two. That would separate their steady muni bond businesses from the more troubled structured finance units, which are being pummeled by CDO exposures.

Indeed, FGIC, a big rival of Ambac and MBIA, submitted a plan with some of those attributes last week. However, splitting up bond insurers would be difficult, pitting policyholders against shareholders of the bond insurer holding companies. "The lawyers have already begun gearing up on that one," said Josh Rosner, a managing director at research firm Graham Fisher & Co.

Injecting capital

So Dinallo and others have also been working on other solutions that focus on attracting more capital into the industry. As part of that strategy, the New York regulator has been trying to persuade big banks that are counterparties to the industry to help boost bond insurers' capital.

Many banks have tried to hedge CDO exposures by buying guarantees from bond insurers in the form of credit default swaps (CDS), a type of derivative. If lots of bond insurers are downgraded or if some collapse, these banks may suffer more write-downs because these CDS contracts will be worth less. See full story.

One proposal involves banks injecting roughly $5 billion of capital into specific bond insurers and also providing a $10 billion line of credit.

Another idea involves commuting, or effectively tearing up, CDS contracts between banks and bond insurers. In return for dropping their claims, the banks would get a preferred equity stake in the bond insurer.

"Putting capital into an insurer is more of a contract issue between the companies involved, rather than a regulatory issue," said James Gkonos, vice chairman of the Insurance Practice Group at law firm Saul Ewing. "That would be the simplest and most efficient way to do this."

A forced splitting up of a bond insurer by a regulator such as the New York State Insurance Department would be an "extreme scenario" that would involve public hearings and litigation and take a long time to complete, he explained.

Still, any re-capitalization of Ambac by bank counterparties would present its own problems too, because it could dilute existing investors in the company.

Such a plan would also use up capital that banks may need to help them through other problems thrown up by the global credit crunch.

"Sometimes there are problems that just can't be solved," Rosner said. "At some point, the market is going to realize that there is not always a best solution. There is often just a least worse solution."

Alistair Barr is a reporter for MarketWatch in San Francisco.

      Are Commodities in a Bubble?

      Are the commodity markets in a pricing bubble? Many people's judgement tells them that they are, as they look at the short term price movements of certain commodities like gold, wheat, copper.

      Granted, they might think that the weak dollar is just making the problem a little worse with a monetary inflation if they are multidisciplinary thinkers. But as you probably know by now, we think that judgement is good, as long as it is informed by solid data. Let's take a look at a few of the commodity charts. As always, you may click on any of the pictures or charts to see a larger version.

      Sure looks like an impressive growth in price, and a potential bubble. How much of that might be attributed to the fact that the CRB is priced in dollars?

      Here is the CRB Index deflated by Euros. That casts a little bit different light on things. It looks as though commodities are rebounding from a low period and going back to retest some prior highs. Historically, just how high WERE those highs?

      Here is a long term chart of the CRB Index deflated by Euros. With this perspective it seems clear that the prior high was just a test of the upper bound of a longer term trendline that shows a gradual rise in the price of commodities that clearly is NOT a bubble. Just looking at this chart, we must conclude that the trend will continue, which implies higher priced commodities in terms of the dollar, until it is broken.

      Trading for the Short Term

      One of the best brief descriptions of how to trade for the short term is in this video describing the trading action from Friday at one of our favorite sites, Alphatrends. You can view it here: Alphatrends Blogspot for Friday February 22.

      Of course we don't always agree with Brian Shannon's interpretations of the short term chart patterns, but we usually do and always find them useful, and listen with great attention and respect. We find his overall approach, and his coaching remarks in passing, to be very appropriate in particular, and his style is our style for short term trades. No matter how good you think you are, traders are fighting a constant battle in adapting to changing markets and new experience, and the creeping bad habits that can develop into major trading slumps.

      Enjoy listening to Brian, and always remember that, once you get past the basics, trading is 90% self discipline and a willingness to subject your ego to learn from the discipline of the markets. Please keep in mind that short term trading, intermediate trading, and investing are very different disciplines, despite their similarities, and each demands its own approach and techniques.

      22 February 2008

      The Great Crash of 1929 - A Walk Down Memory Lane

      It is difficult to obtain a copy of the best documentary which we have ever seen about the stock market crash of 1929. It was written by the award winning screenwriter Ronald Blumer, and produced by Middlemarch Films for WGBH Boston, and shown on the excellent PBS history series American Experience Its title is The Great Crash of 1929.

      The last time we checked you could not buy a copy from PBS, and it's rarely shown on television, perhaps due to a lack of corporate sponsorship (lol). This might have changed but we doubt it. If it is ever shown again on PBS try to DVR or Tivo it, since it is exceptionally well made, informative, entertaining, and contains many insights into the people and the period that you rarely get to see anywhere else, especially in dry economic analysis. It captures the spirit of the time, the zeitgeist.

      The documentary contains a significant amount of original photos, film footage, and personal commentary, arranged in the style that Ken Burns has perfected to bring to life so many other historic documentaries. There is a web site for it from PBS which you can visit by clicking here: The Great Crash of 1929. There is a transcript for portions of the film, and they make interesting reading if you cannot see the actual film.

      We first saw this video when we were doing work in Silicon valley. An acquaintance at a high tech IPO gave us a VHS copy to watch, just prior to the Nasdaq Bubble bust of 2000. It inspired us to investigate many of the written sources cited in the film, including Sobel, Galbraith and Klingaman, and greatly enriched our understanding of this little understood period of American history. It also persuaded us to sell all of our stocks that represented much of our life's savings, a few months before their prices plummeted about 90%. It made a deep impression on us after that. It might make a similar impression on you now as well.

      As George Santayana said, "Those who cannot learn from history are doomed to repeat it."

      NARRATOR: Everything was not fine in 1929 with the American economy. It was showing ominous signs of trouble. Steel production was declining. The construction industry was sluggish. Car sales dropped. Customers were getting harder to find. And because of easy credit, many people were deeply in debt. Large sections of the population were poor and getting poorer.

      Just as Wall Street had reflected a steady growth in the economy throughout most of the 20s, it would seem that now the market should reflect the economic slowdown. Instead, it soared to record heights. Stock prices no longer had anything to do with company profits, the economy or anything else. The speculative boom had acquired a momentum of its own.

      NARRATOR: Wealthy investors would pool their money in a secret agreement to buy a stock, inflate its price and then sell it to an unsuspecting public...

      Mr. ROBERT SOBEL (Historian): I would say that practically all the
      financial journals were on the take. This includes reporters for The Wall Street Journal, The New York Times, The Herald-Tribune, you name it.
      So if you were a pool operator, you'd call your friend at The Times and say, "Look, Charlie, there's an envelope waiting for you here and we think that perhaps you should write something nice about RCA." And Charlie would write something nice about RCA.
      A publicity man called A. Newton Plummer had cancelled checks from practically every major journalist in New York City.

      Mr. NESBITT: Then, they would begin to -- what was called "painting the tape" and they would make the stock look exciting. They would trade among themselves and you'd see these big prints on RCA and people will say, "Oh, it looks as though that stock is being accumulated."

      Mr. SOBEL: Now, if they are behind it, you want to join them, so you go out and you buy stock also. Now, what's happening is the stock goes from 10 to 15 to 20 and now, it's at 20 and you start buying, other people start buying at 30, 40. The original group, the pool, they've stopped buying. They're selling you the stock. It's now 50 and they're out of it. And what happens, of course, is the stock collapses." [and on a large enough scale, the stock market, and the regional or national economy].

      We came to the conclusion back in 1999 that stock market crashes are by and large the end result of reckless credit expansion, lax regulation, and widespread corruption of the society by a like-minded group of individuals who turn society on its head for their own selfish and personal benefit. They don't need to have a plan, they don't even need to communicate. Its simply what they do, like musicians play music, and bakers bake, and painters paint. They are financial predators.

      Of course there are willing fools and greedy individuals up and down the food chain. One only has to look at the current mortgage crisis to see how that happens. They do not intend it to end in ruin, but it seems that the leaders, the primary movers, always take it just one step too far, and lose control, and then step aside.

      Its not because they need the money. Its a pathology, a will to power, a need to be in control. They have great holes in their being, and they try to fill them with the most money, the most power, the most of everything. They feel the overwhelming need to be .... different, better, than everyone else. They join exclusive clubs, send their children to exclusive schools, drive exclusive cars, and do exclusive things to... exclude "the lesser men" whom they might view as potential servants, or useless eaters. And if they cannot excel by writing a great book, or performing great music, well, they can try to stand out by destroying and humbling everyone else by subverting the public good and the law.

      We don't know why it is, but they always seem to cheat: in school, in business, in marriage. They think the laws are not for them, and relish breaking them, while using them to subvert the little people. And they always seem to have a father or mother they despise because they made them feel unworthy. In a way, for them its all just game, because being sociopaths they cannot feel the misery that they cause. They can feel very little actually, and are generally incapable of normal human love and friendship. So they try to feel something through excess and indulgence in drugs, dress, drink, cars, fads, marriages, houses. Incapable of a mature loving relationship, they oscillate between immature romance and impersonal sex. They are driven, and once you get past the public face, they are pathetic, rarely at peace, and often downright scary.

      In 2005 we forecast that 2000-2 was a preview, and that they would do it all over again, and this time the country would not be getting up from it intact for many, many years. We think we're well on our way. May God have mercy on us.