A Bad "Short" Day

I guess today we “Took it in the shorts” (I sure did). It’s amazing how those bank stocks jumped up in price. Wells Fargo raised their dividend 2¢ and the stock rose $7. I guess since the Sage of Omaha owns a lot of it, people are running scared. The guy's not dumb, the stock's a dog and raising the dividend is a John Paul Jones move, only I ain't the Seripis.I’m glad Buffet didn’t raise the dividend 8¢, I might have been sold out! Fannie Mae up $2 and Freddie up $1.50, some real value there! Maybe just a lot of short covering.

I can see Fannie and Freddie jumping around a bit, once you get under $10, you are day-trader-fodder.

The SEC has restricted naked shorts (this doesn’t affect the average trader shorting with local brokerages; they are loaning you the stock). The restrictions apply to primarily hedge funds. The 19 stocks on the list are: Fannie Mae, Freddie Mac, BNP Paribas, Bank of America, Barclays, Citigroup, Credit Suisse, Daiwa Securities, Deutsche Bank, Allianz SE, Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley, Royal Bank, HSBC, J P Morgan, Mizuho Financial, and UBS. Hedge funds are the target of this restriction.

Do you get the idea that a lot of people think that something is wrong with these stocks? Is it wise to own stock on this list? I guess the real question is; do you think any stock on this “Do not short list” is going to prosper in this market and make you money?????

The banking system is pretty much toast; its running from its own shadow. Senator Schumer proved it by pointing to one bank and it dropped dead in 11 days. That bank probably had another 18 months before it would have been a problem child, now we will never know.

The point is, we have a panic in progress. Did we stop it today by banning hedge fund shorts???? Banning shorts has never worked in the past. Do you get the idea that the world you knew is not the world you see now?

Shorting Stocks for Fun and Profit

Lets face it 2% interest in the bank ain’t going to pay for juniors new shoes. So in today’s market (that Bernanke claims is doing so great) a lot of investors are shorting anything that deals in finance. In order to sell stock short that you don’t own, you need 40-50% of the stocks present value deposited in a brokerage account (you also need to sign a statement that says you know all of the rules, so you need to be able to comprehend what you read).

If you wanted to short [Insert financial stock name here] currently trading at $25 you would need $1250 cash to do the transaction. If the stock went up, you have to cover the increase, or your position would be sold out. If it pays a dividend, you are liable for that cost also on the day of record. Let's figure that the stock dropped to $19 and you covered and bought it back, your net would be $600 less brokerage fees. Try to keep a couple of thousand in reserve, for a cushion. Don't get greedy. Not everything goes down (that includes most of my dates in college).

Shorting stocks in a down market is just like buying stocks in a rising market. You can make money. The trouble is, stocks don’t always do what is expected of them. If you short a stock with only 20 or 30 million shares issued, you could run into a bear squeeze. A few large investors see a large short position and start buying the stock like crazy and it takes off and really burns the shorts. The easiest way to accomplish the same thing is for the perpetrator to have a very large position of stock in street name. After it has been shorted by everyone and anybody, the perp calls up the broker and asks for delivery of the certificate. Bear in mind, in this special circumstance, if your brokerage loaned you the perps stock, you could be forced to buy back the short on the spot (read the fine print). In this case, the supply just dried up and the price is going to take off big time. A real loser goes ballistic.

If the stock jumpes above your cash reserves, your brokerage firm can sell you out without asking you. This can be real aggravating if the stock jumps up $10 and you get liquidated. Then later in the day it drops below you initial short value.

In 1929 a bunch of people with short positions got caught when a particular stock took off and went to $900 and the exchange settled with the shorts at $100 a share. I believe the company folded months later. $15 would pay your rent for a month back then.

Is there any reason at the present time why financial stocks should go up in price??? I can guarantee the larger your short position, the less you sleep at nights. The risks are real.

As a cautionary note this is not investment advice. I'm just showing you what other people in the market are doing. It's a little like learning to play poker; it can be fun if you are not trying to use it to pay the rent.

Freddie and Fannie are Still Kicking

The markets got it wrong. When Bernanke and Paulson said that there would be no more bail outs of investment banking and the institutions would be allowed to fail, they weren’t talking about Freddie and Fanny Mae. These two institutions produce a product, a little like GM or IBM. They are not banks. They are business-to-business conduits, who package loans, for investment consumption, with an implied government guarantee.

There is no arguing that both Government Sponsored Entities (GSE’s) are highly leveraged and could eventually fall into bankruptcy. Most of the stuff on their books is 80% first trust deed loans. So even if real estate falls off of a cliff to say 50% of original value, these two Companies still stand to get back 70 cents on the dollar in a worst case scenario. The only really bad loans are those from the last 5 years. They held my note for 18 years, so there is a lot of high quality paper in their portfolios. During the heyday, the most they could have been clipped for in California was 417K per loan. The 1.2 million dollar homes out here are down to 600k and dropping fast. Just who owns that paper is a mystery.

Unless I stand corrected, Freddie and Fannie sold packages of loans. They didn’t sell them as STRIPS, CDO’s or SIV’s. It’s easy to cull out the losers and cut your loses if you hold a group of mortgages. If the investment groups that bought from Freddie and Fannie can return a full package, I would expect them to be made whole. The buyer could however, take a bundle of loans and slice and dice it; at that point, it’s kind of hard to return part of an item. A majority of the crap floating around is stuff that the GSE’s wouldn’t or couldn’t touch.

The collapses that Bernanke and Paulson are talking about are the enterprises that have many investors and are probably under the FDIC umbrella. The new prime directive is “No institution is too big to fail.” The one stop shop banks that do everything are what I would consider prime fodder; Citigroup and Bank of America come to mind.

Someone holds all of this credit card debt. Who is the “Countrywide” of “Plastic Money?” You hear that the average credit card debt is $5,000 per household. How about $5,000 per card? How many cards would you like to have Sir? One for each house you own? Hmmm! “I am just shocked, shocked that they would have so many cards!” Casablanca here we go again!

The banks in this country are very tight lipped about their finances. All it takes is a rumor to start a bank run. IndyMax just bit the dust. Senator Charles Schumer D –NY sent a letter to regulators June 26 claiming IndyMax was a dog. It started a bank run that ended as expected. 4,000 people just lost their job here. Maybe one of our fine Senators from California can reciprocate the favor and send a letter to regulators about Citigroup (based in NY), it's barking like a dog. Here is a new word for the dictionary, Verb: schumer, to be schumered, “screwed over by a politician.” Don’t look for it in a Readers Digest vocabulary test just yet.

Some killer favorites that could ruin your investment day: Citigroup, Bank of America and across the pond UBS.

The Hidden Tax Increase

Congress is talking about free health care. It sounds so Utopian and it looks like it might have a good chance of becoming law, a gift to the Hoi Polloi. Think again, it’s not what it appears to be. Congress has come to realize that the health care benefits promised to the over 65 retirees are in need of serious financing. I would like to believe that we can avoid socialized medicine (another word for free). This is a way to raise taxes to pay for entitlement programs (Medicare and Medicaid) that have no real funding method in place.

Funding Medicaid and Medicare for people over the age of 65 has to come from somewhere. At that age people do need health care (lots of it). Hmmmmm. Why not offer everyone free health care? Social Security started out the same way in 1935, a 2 percent tax on workers. This way, the government can raise extra money out of the 18 to 50 age group; they don’t get sick much and that’s a good thing. The money this group saves by not buying health insurance will be put to better use. It’s the old “FDR tax the young to pay the old,” plan. We are all going to get old so it’s money in our own pocket. Yea, Right! “Free Health Care” is a euphemism for “Raising Taxes.”

Service is a big issue. Compare it to old time amusement parks. They charged a price for each ride and the lines weren’t long. Now there is a price of admission and unlimited rides (you get to wait forever to ride the event). I call it the Disneyland Effect; you are sold a dream, the real part is the long line.

In today’s world it is pay as you go medicine. Now if/when we go to the System of free health care, we will encounter the "Disneyland Effect," unlimited health care with limited resources. Congress in desperation needs everyone to pay into this free health care plan. It will be a little like the Social Security plan that now takes 20 percent of our paycheck. “By God let’s give Joe Six-pack free health care, he deserves it!” Plus the employer will probably get to pay half of it, just like Social Security. Ever wonder where the employer got the half he matches with your half??? Actual wages could increase 10% and you wouldn’t see a penny of it. If fact, you could become unemployed because your boss couldn’t meet his payroll (assuming the employer and employee both pay 5%).

Do you get the feeling that "We the People" are incredibly stupid or that everyone in Congress use to be a very successful used car salesman??? Read between the lines. I’m sure there will be more than one to stand in, especially if you suddenly become unemployed.

Free health care and a tax stimulus check pulled out of thin air. Do you get the feeling that we are about to have an election?

Leader of the Pack

Last year we had a lot of housing bubble bloggers and a many of them have fallen by the wayside. No longer do we hear references to "Canaries in coal mines," "Seating on the Titanic" or "The roller coaster getting near the top--- to the downward plunge." On another note, there were so many participants in the Real Estate Hand Basket to Hell Event, that it will take a while to sort that one out. You could say it was a Country Wide sponsored event.

The dynamic duo running the Federal Reserve and the Treasury wants everyone to believe that the financial markets are in great shape. Bear Stearns and Countrywide were what was wrong with the market???? It’s all fixed and we can go home now??? (If you still have one).


Tell me that no one is shorting the financial markets. This stale chart from Deutsche Bank from last November kind of shows how combining two smaller problems makes for a bigger one later. J P Morgan has absorbed Bear Stearns.(Double click for a larger view)


Bank of America has taken over Countrywide (maybe). There is one bank that stands out among all of them, Citigroup, leader of the pack. Is this a list you want to be at the top of?

The news gets worse, the three biggest credit card issuers are, Bank of America, J P Morgan and Citigroup. The main reason we have a real estate mess today, is because in the past, anyone could qualify for a loan. I wonder what makes credit cards different. I guess the banks are happy if you never pay them off, just pay every month.

Several large banks are in serious trouble, Citigroup trading at $17, UBS trading at $22, J P Morgan trading at $35 and Bank of America trading at $24.

This is where we are at, the solution is simple, the problem is a mind boggler. It will fix itself if left alone. The trouble is Congress; the Duddly-Do-Right of the Canadian Mounties is riding to the rescue. God help us, it’s a little like mixing Preparation H with pepper spray. After one application, your eyes will be so wide open, that you’ll never blink again.

Welcome to the Recession

As the economy slips into the depths of a [Recession/Depression] (your choice), people are starting to consume less. This decreased consumption could cause prices to go up. It sounds contrary to what would be expected. Let’s use a public utility like a water treatment plant as an example. The water utility has fixed costs. They have an administrative billing department and a group that maintains the infrastructure for water treatment and delivery. The more water consumed, the cheaper the cost per unit of production. Notice when consumption decreases drastically, the fixed costs don’t go away. The water company has to charge more per unit to keep in business.

Another misconception,“Raising taxes will increase government revenues.” It often backfires. In the 1930’s many municipalities raised taxes because the real estate base was reduced by more than half in some areas. In this case, raising the tax rate did not bring in more revenue, it brought in even less. People abandoned their homes; they couldn’t pay the bills they had. Banks today, are not foreclosing on certain areas of Detroit. Why foreclose and take possession, only to pay the back taxes and be forced to tear it down? Let the city have it (with both barrels)!

Government services will have to down size. The electricity for street lights is a fixed cost, as are public pension plans for police, fire etc. The tax base is just not there and the fixed costs are just that, fixed. Looks like education, law enforcement, fire and emergency services are in line and up front for a cut.

In private industry, the airlines fixed costs can be a double edged sword. Ticket counters, plane gates, plane leases, take off/landing fees and retirement compensation packages are all fixed costs. Add to that a not so fixed cost of airline fuel and fares that are no longer affordable to many people. Competition for the lowest air fares will run, almost of all them into bankruptcy. Naturally, our government will assume financial responsibility for these failed retirement plans.

The implied future for the airlines, suggest a death spiral for the fast food industry. Why spend 6 bucks for lunch when you can put it in the gas tank? Brown bag it to work with a thermos of coffee. That kind of kills the 4 dollar Starbucks latte. This could really put a crimp in the fast food industry. Figure 241 working days this year, a person could save $2,410 on coffee and lunch ($3,000 if you add in the taxes paid earning it).

Common sense doesn’t seem to work properly in our new environment. I guess too much money has fogged our sense of reality. Don’t expect too much help from Congress they’re all over at Countrywide getting their “Friends of Angelo” loan. Since 5 of the 6 caught were Democrats, it brings to mind the quote "If Democrats had brains, they'd be Republicans" (Don't take it politically--just joking around). We're just looking at those who got caught. I suspect there are a lot more, the imbalance makes me suspicious. I don't hold either party in high regard.

There is also a rumor floating around that the "Dodds Real Estate Mortgage Bailout Bill" is going to be renamed the "Bank of America Self Enhancement Bill." This way, the people that wrote it will get credit for their work.

It's a little like giving a hooker a signed blank check, with the taxpayer picking up the tab. Of course I guess we shouldn't bitch, the money is coming from the same place Congress got the 150 billion stimulus package to give to us. That was painless, wasn't it?

Link: Stop The Housing Bailout------------Click here to sign the petition. Name and email and you are done-- quick and painless.

The Fed has a deal for you

Here is a little unnoticed item in today's Wall Street Journal page B7 Saturday June 14 under "Legal Notices." There is a sale in progress of CDO's and RMBS's, also known as "Collateralized Debt Obligations" and "Residential Mortgage Backed Securities." The total amount being auctioned off is a "measly" 2.3 billion dollars.

Auction 9 represents about 274 million dollars.



Auction 20 totals out at 412 million.



Auction 24 is only 260 million



Here are the people throwing the party:




Here's your program guide for the whole show:



You can Google the first four or five numbers of the cusip to figure out whose name is on the certificate. That can give you an insight into the quality of the security, but it won't tell you who currently is holding it. I have an idea who may be selling this crap, but I could be wrong.

The Explosive Oil Bubble

Future’s contracts take the risk out of changing prices for both the buyer and the seller. A gold producer with a cost of production per ounce of $600 needs a guarantee that they can meet payroll, insure a profit and stay in business. A circuit board manufacture in selling product must buy gold for production at a known cost so they can deliver the product at a predetermined price. Used properly, the futures exchanges take the risk out production.

The price of oil has a very direct impact on the major airlines. They buy jet fuel futures out a couple of years, to lock in fuel costs. This very quick doubling in the price of oil since August of last year has pretty much killed the futures market for the airlines. I am suggesting that they don’t dare to commit to the higher prices long term (I could be wrong). Their ticket prices are locked to their fuel prices. The Airlines are buying spot hoping the prices will come down. It’s kind of like buying Mayonnaise. You buy two for $5 on sale (when you don’t need them); otherwise the spot price is $5 per jar. Remember when California utilities went from contract gas to spot, because spot gas was so cheap? Well, spot gas went through the roof. Hmmmmm

There is nothing illegal going on with the commodities markets. The margin requirements are the problem, they are way too low. Six percent margin encourages speculation. Hedge funds can be rather big players. Plus they are not government regulated. 16 to 1 leverage on commodities futures is a pretty good return. It’s my contention that oil has gone so high that no one is buying futures to lock in a price. Futures are being bought and sold, but only by speculators, producers and refiners. The futures buyer that needs product is only buying on the spot market in the hopes the market drops to a more reasonable level.

Two things are happening, everyone is consuming less oil and anyone with production capacity is bringing it on line. When an airline takes out of service 100 jets, that’s about 3 to 6 million gallons of jet fuel per day not being burned (a 747 holds 64,000 gallons--$256,000). Product for delivery is going to increase. Just with any bubble, there is that final surge before it pops.

The price of crude oil has gone up $15 in two days. It’s reminiscent of the housing fiasco. We can all get rich. Remember the two Bear Stearns hedge funds that collapsed last July? Leverage was the contributing factor. It exposed the real estate mess and it’s been downhill ever since.

What happened in the 1930’s to bring this country to its knees was not illegal. The investment trusts of that time, are our hedge funds of today. They were financed differently, but make no mistake, the leverage was the same. It was 10% margin in 1929. In today’s world, we have 6% or less--we know what we are doing, (and they didn’t?). Yea right!

Goldman Sachs and Company in 1929 had close to one billion dollars of securities in three investment trusts; Goldman Sachs Trading Corporation, Shenandoah Corporation and Blue Ridge Corporation. They were the “Bear Stearns” of their day. All three by 1932 were worthless. [Note: $15 dollars would pay the rent for a month in 1929, in today's money that billion lost, would be equivelent to 100 billion dollars]

The present status of the oil supply it is not easy to calculate. Storage facilities for the US are known, for the rest of the world, they are unknown. There are so many different oil producers, that total production is only a guesstimate. At some point in time with the economy going into recession and with most of the major airlines facing bankruptcy, we are going to have more oil than we can ever use.

The futures market is a ticking time bomb. If oil drops $40, it could turn into a catastrophe. The hedge funds would plunge into the abyss taking with them the banks. Congress could dust off the Glass-Steagall Act of 1933. It kept us out of trouble for some 65 years only to be repealed in 1999.

Bernanke is a little like the Sorcerer's Apprentice in Fantasia. You don't need to buy a ticket to this one; it's more than a movie!

Crude Oil Bubble Trouble Part II

Bubbles don’t wave red flags and are not considered bubbles until they pop. They are usually touted as tremendous investment vehicles. A bubble has many things going for it. Low financing costs and high returns with little (perceived) risk and a lot of participation. The stock market crash of 1929 was done on 10% margin. The housing collapse of the late 1920’s was done with 5 year interest only loans, as was our current housing bubble.


Common sense has to come into play sooner or later. Remember all of the lame excuses why housing prices would continue to increase? We have unoccupied half million dollar houses all over San Marcos with burned out lawns. I guess rich people don’t like to live here anymore.

Four dollar a gallon gasoline? How long can it last? Congress can get us to four dollar gas the old fashion way, but this is way too sudden. With oil at $131 a barrel, The world's largest known oil field becomes economically feasible. The Athabasca Oil Sands reserve of Canada will come on line. The trouble is, it could take about 3 years. By that time oil could be back to $60.

Even though we consume a little more than 1/4th of the world’s oil, we can afford to pay the price. The rest of the world cannot, they're already broke. Pundits point to the gas subsides by third world governments. It matters little, whether it is the government or the consumer who pays. It’s one and the same person. Of course 90 percent of the people in this country have a complete disconnect when it comes to government spending and the tax base it is drawn from. It's a little like free government health care, nobody has to pay for it (there’s a wink and a nod in there somewhere).


With spot oil at $131 a barrel and the futures three months out at $127, just buying 10 forward contracts with 100K (6% margin) you have the chance to double your investment over the span of a year. There is a hell of a risk, but no more so than buying a million dollar McMansion (interest only). The oil market could go south real quick. The imminent collapse of our major airlines could do it. The speculator with 10 futures would not be able to make the margin call. What that could do to the commodities market leaves one room to pause.

Just maybe the Chicago Board of Trade is FDIC insured. I haven’t heard anything to that effect but I’m sure Bernanke knows.

Gas will be back to $2 soon. You don't need as much once you lose your job.

Crude Oil Bubble Trouble

Up on Capital Hill, Michael Masters of Masters Capital Management hedge fund gave some insight into the oil crisis as quoted from MSNBC

If you're wondering why driving to work has gotten so expensive, you might want to peruse your pension fund's investments. That's because speculation by institutional investors pouring money into the commodities market may be largely to blame for spiking oil prices, according to testimony on May 20 before the Senate Committee on Homeland Security & Governmental Affairs.

The margin requirement for trading commodities on the NYMEX is 6%. So one oil futures contract 1,000 barrels of crude worth $131,000 can be leveraged with only $8,000 of margin money with a reserve kicker of $3,000. 16 to 1 is pretty good leverage.



Another thing to look at is the amount of oil we use. The US consumes about 22 million barrels per day (b/d), China about 7 million b/d. Total world production is about 87 million b/d. China is not about to set the world on fire with an increase in consumption any time soon. We are the gas hogs, and at these prices you can bet your bottom dollar that we are consuming a lot less gasoline. Look at the Consumer part of the list below. There is not much credibility to the idea that the Chinese are gobbling up oil.


Back in the 1970's we had a supertanker glut. They produced too many. It looks like we have another now.Here's a curious tidbit from Crude Production Blog dated April 18, 2007 (13 months ago).

The cost of transporting 2-million barrel consignments of crude oil from Middle East ports on supertankers may extend a three-week decline because there are too many ships available for hire.
About 104 tankers can reach Persian Gulf ports by May 18, according to a report today from Paris-based ship broker Barry Rogliano Salles. That's already enough to cover the entire month's demand, based on April shipments. More vessels will become available later in the month, increasing the glut.

The biggest supertankers can hold 550,000 tons of oil at 7.2 barrels per ton, which is about 4 million barrels, figure about 4,000 futures contracts. Round trip time from Saudi Arabia to New Orleans is 65 days. Maybe they are full and sitting parked somewhere waiting for oil to hit $200 a barrel.

What's going on??? Refineries are probably cutting back on production of gasoline; people are cutting back on driving. Inventory has to be building up. We have an unknown number of tankers that could be hiding large quantities of oil. We have a lot of investment funds that got burned on real estate, the commodities market could be their last chance to get whole (or get sucked into a black hole).


Look at the chart above. It's a three year chart of the oil futures. Looks a little like the housing bubble. Nah, it's just my imagination running amok again!

There was a corner of the silver market in 1980. Here is a quote from Traderslog.com (the correction is my doing)

In the fall of 1979, the Hunt Brothers, along with some wealthy Arabs formed a silver buying pool and bought up 200 million ounces- the equivalent of half the world's deliverable supply. The price of silver had moved from $2 per ounce in 1973 to $5 per ounce in early 1979 and then rocketed as high as $54 in early 1980.

The officials at COMEX moved to check this cornering of the silver market by raising margin requirements [by only allowing liquidation orders]. The highly leveraged Hunt Brothers were unable to meet their margin calls, and were forced to sell. The price of silver fell dramatically; on March 27th 1980 the price fell 50% in one day, from $21.62 to $10.80. The Hunt Brothers were forced to declare bankruptcy. Bache Group, which handled of the trades for the brothers, was financially ruined.

Oil has gone from $55 a barrel on up to $132 a barrel. Inflation could account for about $30 of that increase. I wouldn't blame this mess on the oil companies, this has all of the ear marks of a speculative corner of the oil market by parties unknown.

The commodities markets are going to have to limit the number of contracts written and only accept liquidation orders like they did with the Hunts. It's kind of like sticking a broom handle into the spokes of a moving bicycle. It will be quick and brutal. Hold on to your SUV and your hat, another bubble is about to pop.

Congressional Smoke and Mirrors

A couple of weeks ago Congress had an investigation on big Oil. One of the Senators asked the oil man why they didn’t pass the profits down to the consumer (I guess it’s not right to make a profit in the United States). The CEO said that he didn’t think it was practical. Then yesterday the local channel had a bit on retail legalized marijuana stores here in California. They asked the vendor what the sale price was per ounce and she replied “We keep it at the same price as the illegal stuff, if we didn’t, we would be supplying street users who would still sell at their regular price.” It kind of seems like the dope dealers of this country understand basic economics better than our elected representatives.

Gas prices are going through the roof. At these prices there is going to be a lot of oil entering the market, probably more than the consumer can use. At some point prices have to drop. It’s a little like the housing bubble. As prices rose, more houses were built. Now we have a large supply and no one now really wants one. The odd thing here is that Congress wants to maintain the high housing prices in order to keep the real estate market stable. If gas prices collapse, would we have a gas bailout also?

Congress can run investigations on why things are more expensive. In reality, the items we purchase don’t cost more, the currency is worth less. Counterfeiting is against the law, but spending more government funds than you collect in taxes is not. Let’s face it, the 160 billion dollar tax stimulus was not real money, it was not earned by anyone.

From a simplistic economical view, a worker makes 100 dollars worth of widgets and at the same time, the government prints $100. There is now 200 dollars chasing the produced widgets. This item didn’t double in price. But, by God, Congress is going to grill and roast that widget maker. How dare anyone gouge John Q Public? You can't see the smoke and the mirrors but they are there.

The average person has no idea that Congress is the problem. Isn’t it amazing how politics can solve our economic problems with just a printing press? It’s kind of like trimming your toenails with a guillotine. The solution is a problem.

The Press, the Election and Inflaton

If you are newspaper editor, the politician with the best ideas is out of luck. You need controversy, that sells papers. The media picks a “Clash of Titans,” and runs with it. So what do we have, “Hillary vs Obama.” I really can’t figure this out. In my opinion, the Democrats had the election won if they picked anyone except those two. Either one of them would have been fine VP material. Then you go over to the Republican side and we have someone pushing 70. From a journalistic point of view, the Democrats are news and the Republicans are “Wet paint on a wall drying.” The Democratic Party is eating this up. Press coverage up the ying yang. Who cares who wins, Joe voter thinks that the Democrats are on a roll.

After the Presidential primary on both sides, each party will have to choose a vice president. Examine who is chosen closely; one of them may be our next president. McCain has to pick someone old enough to hold the office. Obama would have to pick a white guy. Hillary could put Bill on the ticket as the VP.

I am making fun here, but there are serious issues that are not being discussed. We have a political mix here that is beyond being lousy. We have a woman who wants to be our mom, a young guy that wants to lecture us on what we are doing wrong and and old guy that's scared to buy green bananas. It’s a vote against the people you don’t like as president. People do not like to support losers. So with the Democratic Party, half of the supporters are automatically losers. If Hillary loses, those Democratic votes are gone. If Obama loses, I see the votes switching to Hillary. The real thing to remember here is at the convention, after the first vote, all of the delegates are released from their voting commitments, look for an even split between the two candidates up and to the convention. After the first vote, we have a free for all. It could prove interesting. My sneaking suspicion is that Hillary wins and Obama is offered to be the VP. You got to admit a woman and a black running for president, it's a little like an Arab running for president in Israel. It's going to sell some papers, but is the reality factor really there?

As for the Republican convention, I think that the Vice Presidential selection will be the make or break for the party. It will probably be a younger governor of some state.

Examine the typical voter. This person actually thinks that things are going to change after the election because of the election. Wrong! Things are going to change because a lot of stuff is becoming unglued. There isn't too much to fiddle with if you look at this picture of the budget.


We need to vote for fiscal responsibility. Balance the damn budget. The inflation we are experiencing is a tax. When someone says we need to strike back at the oil producers for this price increase. Think again, our government is printing too much currency. It’s a little like chopping a hole in the bottom of your boat. The people in the boat notice that the water level on the outside of the boat is rising. It’s a great observation but that’s not the problem. It’s the nut [insert your Congressman's name here] with a hatchet.

In the Land of Unintended Consequences

A Time magazine article April 4th pointed out that 1/5th of our corn crop was diverted (hijacked) to ethanol refineries. Corn prices have shot up and American farmers are planting less soy beans. Brazil in turn has increase soy bean production. Of course they are burning down a rain forest to do it. This ethanol lowers our dependence on foreign oil and at the same time increases the price of beef. We get to save a dime on gas and get to choke on the price of ground round.

20 years back in Africa, the UN showed starving people in one country how to plant crops and use fertilizer. The net result was increased food production and an increase in population. One thing little noticed was that families needed firewood to cook with. Once the country was denuded of trees, the farm land washed away with the rains. A great plan ran amok because of firewood. People died as a result.

The government and Congress are going to save Bear Stearns, Countrywide, give everyone who paid taxes $600 dollars and keep the economy out of a recession. You know they mean well, but maybe just doing nothing might be a better approach. My only question is this; whose money are they going to do it with? Don't they have to tax people to raise the cash? We are going to poorhouse in an air conditioned limo, forget the hand basket to hell, that’s step two (when YOUR healthcare runs out).



The voters seem to think the political party in power is responsible for our present situation. From a more realistic view, what we are experiencing today, is the result of plans put in motion 5 to 75 years ago. Clinton in 1999 signed the repeal of the Glass-Steagall Act (from the depression) which freed up the banking system (you can kind of see where that went). The final outcome could be the reverse of what was intended.

The real issue here is that the solution can result in a bigger problem. Note also, the people with all of the solutions, are usually part of the problem. Time is the only true test. The real estate market may seem to be just one issue, but it is intertwined with the banking system, the economy, Wall Street and government. Change one program and everything else moves in some unintended way. It's a little like taking Viagra, only to have your hemorrhoids swell up. You knew what you had in mind, and it certainly didn't involve a lot of pain! Our Government works almost in the same manner.

Our New Dollar is a Dime (reprint)

---Reprinted from May 19, 2007

Here are two pictures; the new Presidential dollar and an old silver dime. Just for a laugh, which one is worth more? Answer, the silver dime is worth about 60 cents more.



To be a millionaire in the ‘1960’s meant something. In today’s world, a millionaire is a piker with 100K in 1964 dollars. Inflation makes people think that they are getting richer. People are making more money and their house and other investments have appreciated. What could be better?

Inflation is the hidden tax. Government spends a little more each year than they take in, probably about 3%. Over a 20 year period, the decimal point moves over one space to the right (i.e. $1,000,000 becomes $100,000). This worked pretty much OK until they passed Social Security.

When you contrast the silver dime with the new dollar, a new problem becomes visible, inflation taxation vs COLA (cost of living allowance) linked retirement benefits. What is different now, is that most of these retirement items that everyone depends on, were locked into the dime that was made of silver. So now benefits have to pay at the old dollar rate, inflation adjusted. As long as the dollar could inflate without COLA's, there was no problem. Once Congress linked the cost of living into retirement benefits, it created a monster that would bite them in the ass with every COLA increase.

Let's add to this, the health care package for seniors. Imagine, at the age of 55, your health insurance cost is $300 per month. What a relief that at age 65 it will be free. I am still talking BUBBLES and this is bigger than all of the rest. This bubble is not going away. Give it another 15 years before it's visible. The real question to ask; "Is it possible to believe that we, the people (the government) are really going to pay for what, we the people, (as individuals) could not pay?

Well, this kind of gives you an idea of where we are headed. They have super sized the dime and called it a dollar. So size does matter to your Congressman, doesn't everybody deserve a bigger dollar?

The government claims the inflation rate is under 3%, that keeps the COLA's low but kind of ruins their credibility. The real rate is probably closer to 12%, that's if you buy gas, milk, meat and beer. (Who can afford to buy all four at the same time?)

The Mutual Fund Run (Reprinted)

------Reprinted from May 14, 2007

There are about 8,000 mutual funds in the United States and 55,000 worldwide. Of those in the US, 4,600 were stock mutual funds. 55% of the money invested in mutual funds is invested in Stock Mutual funds (5 Trillion dollars). 48% of all of the Mutual Funds are in tax deferred accounts. Mutual funds owned 23% of all US publicly traded stocks for the year ending 2005. There is more info on this at
Link.

If the stock market turned bearish and started to drop drastically, your mutual fund portfolio would drop in value. At this point you have three choices; withdraw your funds, switch to a non stock portfolio with the fund, or do nothing. With withdrawal, you could face an early withdrawal penalty of 5% or as with the tax deferred accounts, an IRA penalty on top of that.

Notice that 52% of the investors have the option to withdraw without tax penalties. The rest probably have the option to switch from stock to money market funds. Here’s where things start to become unglued. The mutual stock fund facing redemptions has to sell stock for redemptions, and also for the transfers being made to money market funds.

The stock fund manager is sitting in his office wanting to buy the market, everything is at a discount. What’s he being ordered to do? Raise cash! So what’s he about to do? Sell into a declining market. I just hope they don't try to sell the whole 23%.

The real disconnect that I see in the mutual fund market is the interest in the foreign funds. The Asian markets are touted as a "New Frontier." My jaw can't drop that low, I'm just too old. When Templeton suggested to buy that market, the absurdity of the idea boggled my mind. Don't go there!

Foreign mutual funds in a panic could be dead meat. The natural instinct in foreign countries, in a panic, is to dump the local currency for U.S. dollars. The first thing that their government would do to stem the tide is to pass laws against repatriating the currency. In this case, you could cash in the foreign stock fund into local currency, but what good will that do, you can't convert it to US dollars? I'm not even touching on the corruption in third world Asian markets, Japan included.

So what happens if the stock market drops like a rock? The investors in these stock mutual funds are going to pull out of the fund or wish they had. This will force the money managers to sell into the abyss. In the 1930’s they called it “A run on the bank.” In 2001 it was called a 50% haircut. Get ready for the Mutual Fund Run and by the way, it's not a marathon!

Bernanke's "Hail Mary" Pass

I was just listening to Karl Denninger’s U Tube expose on the government stimulus package. I pretty much agree with his math, and what it will cost the average home owner, but I believe that the Fed and Congress have with a little miss-direction, something else in mind. The problem is far bigger.
Don’t believe for one minute that Congress decided to give us a stimulus check. Examine the S&L collapse of the 1990’s. We, the tax payers, paid over 100 billion to bail out the banks. This is just a different approach, kind of a pre strike initiative. The ultimate goal is to inject the cash into the banking system, resulting in increased liquidity for the financial markets. The average Joe on the street thinks the government is doing something for him. Yea right!

To view it in a different light, everyone’s savings was just taxed at 10%. No tax was collected. $10k in the bank now has the purchasing power of $9K. Deposit the check and $10K becomes $11K but it's only worth $10K. The taxpayer got nothing out of the transaction except a warm and fuzzy feeling that the government did something good for them. As Karl mention, we got screwed by Congress and we thanked them to boot. The irritating thing is a majority of people have no idea what we are discussing here and I am afraid it will remain so.

The Fed (Bernanke et al) and Congress are trying to keep the financial system from imploding. Any solution, in this case, no matter how ever far fetched, is worth a try. Their reasoning, "It’s at least a 2 to 20 trillion dollar mess. If we can spend 5% of that and keep it from happening, it is well worth the investment." The alternative is an inconceivable financial collapse. This is a "Hail Mary Pass" for the end zone. The only trouble is, this isn't the last seconds of the 4th quarter.

Government can't create money out of thin air. Inflation is a government tax. Accept that as fact, and the picture becomes clearer. In algebra, adding the same amount to both sides of the equation does not alter the values. If you want to call it a Stimulus check, be my guest.

There is one problem that everyone is glossing over here. Two to twenty trillion dollars has been lost. Whose money was it? There is only one place with big money like that, our retirement savings plans. Let's keep quite about this; we sure wouldn't want to start a panic.

Don't pay any attention to the pictures; they have nothing to do with what I'm talking about (I'm lying). Double click the picture above for a larger image, you need to read the fine print.


A $100 doesn't go far any more. Look for the $1,000 bill to be reissued back into circulation. Do you notice a pattern starting here??

Copyright 2008 All rights reserved

Unintended Consequences

In 1939 we had “Appeasement” to keep from fighting a war with Germany. It kind of worked for a couple of years; we still had a war, but if we had nipped it in the bud, it would have been small. World wars tend to be large.

Congress gave a subsidy for growing corn to make ethanol, and the price of beef went up. Turning food into fuel is pure lunacy. The funny part is the subsidies more than make up for the unprofitability of the venture. God bless Congress for their infinite wisdom, their group stupidity will kill us (if their kindness doesn’t). I would like to see the gas stations give you the quart of ethanol instead of mixing it in your gas. You’d be able to fill your tank and get tanked. The DUI would be an unintended consequence.
The Fed dropped the interest rate when the stock market took a dive in 2001 and the real estate market took off. The solution to one problem created a new problem; of course everyone knows that real estate has hit “bottom.” The Fed bailed out Bear Stearns and God knows where that is going yet. Ben’s 30 billion dollar loan will buy a lot of “Blue Sky” (assets with intangible value). B of A is about to throw away the sucked out dry carcass of Countrywide. I guess they get to keep CW’s loan servicing department. This outcome however, was far from unintended.

Congress a few years back passed a law that allowed farmers to depreciate heavy farm equipment over five years. Every business in the US bought a Hummer as a 50K write off! A great business expense when gas was $1.50.

We need to accept the idea that the solution to one problem creates a new problem. If that wasn’t the case, we would have solved all of humanity’s problems hundreds of years ago. Once you realize this, you begin to understand politics. The problems are real, but the solutions are only trade offs. The whole mess will sort itself out with or without any intervention. Intervention will not change the final outcome.

It reminds me of the saying “give a man a fish and you feed him for a day, Teach a man to fish and you feed him for a lifetime. The unintended consequence here is you have a couple of guys in a boat drinking beer all day. The additional unintended consequence is a mad wife with a frying pan. Ouch!

Copyright 2008 All rights reserved

Will Congress be there when we need them? (reprint)

-----------Reprinted from 1/31/07

So let’s see, the housing market is going to hell. The tax base for that market is also going to take a dive. State governments are going to be in trouble. Revenues counted on are not going to be there as projected.

[Update 4/29/08: California's Governor Schwarzenegger has increased the projected budget shortfall from 10 billion to 20 billion.]

Let’s move to the Federal Government. Everything is moving off shore. The tax base has to be less than last year and the projection was for a better year this year. Transfer payments for Social Security, Medicare and Medical are increasing. There is that giant sucking sound coming from Mexico (A Ross Perot metaphor) is there a solution in sight?

Think about it from a Congressman’s point of view. 40% of his constituents are Republican, 40 % are Democrat and 20 % are lunatic fringe elements. (I classify lunatic fringe as people that vote left or right on one issue only, i.e. gun control, abortion etc). Divide all of these figures in half and you have the actual voters. So we have about 20% Republican, 20%, Democrat and about 10% hanging from the ceiling.

Let’s figure that you got elected to Congress. You want to get re-elected, who do you cater to? Answer: the 10% hanging from the ceiling; gays, lesbians, abortionist, pro life, gun fanatics, anti war demonstrators. What don’t you touch? Answer, the “Silver Foxes (AKA retirement central)” and any item that is still working. Why? If you mess with something, say a retirement program and things go wrong you will be blamed. Even though Social Security is in a bad way and the Medicare payments are escalating, there is no call to fix it. You cannot be a Knight in shinning armor unless there is a Dragon. So why fix it if it isn’t broke?

In effect, your Congressman isn’t going to do a damn thing. Inaction will keep him or her re-elected. To face the problems, realistically would be a grand vendetta, but in reality it would be political suicide.

So what do we have to look forward to? Answer, a country that might be fed up with Democracy. It happened to the German Republic in the 1930’s, voting got them nowhere. They threw the bums (Legislative body) out the hard way.

There is a humorous twist for buffs that think history repeats itself. Germany was the essence of Democracy in the early 20th century. Adolf Hitler, Austrian born became the leader of Germany. Today we have Arnold Schwarzenegger, born in Austria, governor of California, and there is a move to amend the Constitution so he can run for President. I don’t by any means mean to compare Arnold to Adolf, but the similarities jump out at you. The coincidence was too tempting to pass up, but it does make you wonder, what if---hmmmm

Copyright 2008 All rights reserved

Real Estate the Tip of the Iceberg

On one side you have the upside down home owner, who is about to walk away and give the bank the keys. But the other side, the bank paid the seller real money for the house and the new owner signed a note to pay the debt. Many suggest that this serves the banks right for loaning the money so carelessly in the first place. Think twice about that, the money paid wasn't the bank's, it belonged to a depositor. Banks don't lose money, people do!

Today the Bank of England announced that they are offering to swap 100 billion of government bonds for mortgage securities. Welcome to the Bernanke bailout party. Amazingly we are 8 months into this mess and still, no one has lost a dime.

If we can agree that real estate is only the tip of the iceberg, then it becomes apparent that the financial banking system, is in a very precarious position. Throw in hedge funds and the visual aid is no longer to scale, it's not big enough (use your imagination). The Iceberg represents real money borrowed from someone who works for a living or has money in an investment vehicle. It doesn't belong to a hedge fund, bank, IRA or 401k, it belongs to real people.

Industries are downsizing and laying off people. The big auto companies and the airlines have reset their pay scale to be more competitive. The housing industry has [fill in the blank]. More people are looking for work. These major events should raise some alarm, but curiously no one seems to notice. The unemployment numbers are starting to add up.

Look for a major bankruptcy's like the one in 1932 when Ivar Kreuger the famous Swedish Match King committed suicide. The guy was the "Warren Buffet" of his time.

This is a slow but methodical meltdown. Real estate is where all of the castles have been built, and the stock market is our sand box to play in. Maybe Icebergs are a little like our government, most of it is hidden from view.

To a majority of Americans "The Economy" is just a concept, little understood. Most people have never studied basic economics. The "Group Think" is that Congress can fix what is broken. Congressional solutions are a little like trying to use your clothes dryer to dry the kitchen dishes and glassware. When the buzzer goes off, you can rest assured that everything is dry! You end up getting what you were promised, but it's not quite what you had in mind.

Copyright 2008 All rights reserved

Shooting the Moon

The financial institutions of the world have admitted to about 600 billion in loses so far. Uncle Bernanke coughed up 30 billion for Bear Stearns. If you figure that we are in a dive that will take the normal 6 years to pull out of, then we have a considerable amount of loses to be realized. It looks as if the loses could go hyperbolic. In real estate we are only 8 months into a situation, which normally takes 6 years to stabilize. The trouble is, we have already set records going into this mess that exceed the amounts from the last down turn, numbered in years, in months. It looks like we have 8 to 10 times the velocity of the last real estate slump. We are really moving.

Another thing to look at is the acceleration factor. Is it getting better or getting worse? Our government claims the brakes are on full (getting better). You have to wonder about that. The government is doling out 150 billion dollars to the taxpayers for doing absolutely nothing.

In a card game called Hearts, there is a maneuver called “Shooting the Moon” where one person takes all of the heart tricks. The player doing this has the option of adding 26 points to everyone else’s score or subtracting 26 off of his score (lowering his own score keeps the game going [more $$$] if one of the players is approaching the end of game point score say 500).

This tax stimulus could be called a “Governmental Moon Shot.” The government had the option to tax everyone and pay for the mess or print more money. To realize this effect, imagine that Congress passes a 10% tax on all money saved in banks or retirement funds (there would be riots in the street). But if they print more money, $10,000 in the bank, is still $10,000, but now it will only purchase $9,000 of yesterdays goods.

Giving away money in an election year isn’t a bad idea. You get $1,200 back, and think the government has given you something. You have been fleeced like a lamb. It’s a little like buying invisible goldfish as an investment, they’re not much to look at, but you’ll make money breeding them. Yea, right!

The real irritating thing about this mess is that we can count the 150 billion in the stimulus package and the 30 billion given to Bear Stearns. Whatever else the Fed is buying from the rest of the banks, is being done behind closed doors. It kind of makes you wonder what we’re going to get for Christmas this year. I just hope they're not going to give us our lunch!

Copyright 2008 All rights reserved

The Social Security Healthcare Boondoggle

This is an edited reprint of "The Social Security Morass" 7/9/2006

F.D.R got Social Security going during the Great depression. If you examine the original idea, it wasn't too bad, only about 8% of the population at that point in time would ever live to collect it. Now over 60% of the population will live to "collect" it.

The Social Security tax is supposed to be deposited into a trust fund. To make the story simple, The Congress has written some IOU's and spent the money. Someone complained about this abuse. The Supreme Court ruled that the Social Security tax was just that, a TAX and the government could do whatever it wished with it.

How about Medicare and Medicaid? Why worry about Social Security, that's a nickel and dime game compared to free health care for the elderly.

There is another one called SSI (Supplemental Security Income). You can draw from this fund if your Social Security check is below poverty minimums. A lot of immigrants in this country legally, over the age of 65, qualify for this program even if they have never worked a day in their life. They are also eligible for Medicare. Imagine, a foreigner can qualify for a retirement pension of about $637 /month ($956 as a couple) with free medical, not bad! If I wait and retire at age 66 I will qualify for $767 per month from Social Security otherwise its $502. Go figure!

All of these benefits are Transfer Payments. The money doled out is spent on consumption. There is no real investment in new enterprises. These funds are being borrowed indirectly from your children before they have even earned it. There is no budget amount set aside for these future expenditures. It’s pay as you go. Doesn't it sound just like an interest only no money down housing loan, such a deal!

We are at a fork in the road, similar to the 1930's. Germany decided to hyper inflate and ruined anyone that had any savings. The US survived with deflation and ruined almost everyone with a bank account.

Will we be able to enjoy our future government retirement benefits? Hint: The tooth fairy doesn’t do seniors. Congress is not going to fix anything that isn’t broke. When it breaks, they want to get credit for fixing it. It’s kind of like a firefighter that moonlights as an arsonist. You get paid for doing something you shouldn’t have done, and get thanked for fixing it.

Copyright 2008 All rights reserved

Bigger Bubbles To Pop

Everybody knows about the housing bubble. In nine months, it has gone from blog-talk to front page newspaper headlines. As for the Recession, our government has yet to forecast even one. What has been ignored is the intertwining of three major bubbles: Government Funded Programs, Private Sector Finances and the "Hot" housing market!




The degree of overlap between bubbles is meant to suggest that they have implied financial liability. Any thing overlapping the Government bubble would have insurance protection (ie [housing bubble, Fanny Mae] [Finance bubble, FDIC Bank Insurance]).

The financial markets supplied the easy money for the housing bubble. They also supplied the cash that funded all of our credit card debt and our soaring stock market. Where did the money come from? It isn’t hard to figure out; it came from someone’s savings account. Total US retirement assets are at 17 trillion dollars. Here is a