Jim Roger's Opinion of Helicopter Ben

Here is a seven minute video on Jim Rogers reflecting on the Grand Wizard Ben Bernanke. It's worth viewing. Notice when he says that housing is in more than a recession that suggests things are a lot more dicey than most people believe. The bottom to the RE market is a while away, so it gives one chance to ponder the effects of the next rate cut scheduled for tomorrow. Unfortunatly, IMHO, the last thing we need is a rate cut. Click here to view the video.

N Y Stock Exchange Changes the Rules

Bloomberg reported Friday that the NYSE eliminated computer trading curbs when the market goes up or down drastically. Last December the exchange completed their conversion over to electronic trading. Then in July, they got rid of the uptick rule which prevented the shorts from piling on in a down market. The training wheels are off.

With all of the computer trading going on, things could get a bit wild. Each Mutual fund, pension plan, IRA etc, probably has a program that will instantaneously calculate and execute arbitrage positions to take advantage of the current market. What we may be looking at is an electronic financial war, your retirement fund against mine.

The computer programming used by the NYSE has been pretty well tested in an up market, but it has never really been tested in a down market. It’s a little like the housing market. No problem going up.

Suppose someone types in a sell order with too many zeros in it by mistake and hits enter. White out isn’t going to fix it. By the time someone says oops, we could have a meltdown. If the herd (seasoned money managers) panics, it’s going to be over fast (speed of light comes to mind). It’s kind of like having a party where you use dynamite sticks for birthday candles; everyone's going to remember that special occasion for all the wrong reasons.

Perception: Your Point of View Verses Mine- reprinted

This is reprinted from July 15 2006. It may help you look at the world a little differently. I have to examine this issue every time I publish.

After cruising a lot of blogs, I've noticed something that I wasn't really aware of. Ever notice that after you buy that new car, you seem to spot a lot of them on the highway, whereas before the purchase you didn't? The thing that I noticed was, the fact that our minds are sharpened to recognize stimulus that we accept into the model of our perceived world.

The real estate bubble bloggers, see the real estate market falling off of a cliff. The real estate agent sees a return to a more normal market. It's not really a matter of who is right, but rather one of timing. Real Estate has been trying to fall off of that cliff for several years, and yet some real estate agents are making a decent living.

I do believe in the example I have cited with real estate, it will fall off a cliff. The "when" part I am not sure about. What needs to be pointed out is that what you expect to happen, colors how you perceive the markets. It's kind of like the cartoon of two men on a very small island. One puts oar locks to the left and right and puts in two oars and starts to row to the west, the other guy on the island throws his hands up and says "you're rowing the wrong way!"

What needs to be realized is that what we want or expect to see, is far more observable than that what we care little about. Captain Ahab harpooning the great white whale nailed the whale, but the rope was wrapped around his leg--he didn't see it coming.

Our faulty perception of the world can harm us. Real estate could be collapsing and you laugh at the guy that looses his house. With 100% financing, don't laugh at him he's home free. It's the bank that gets hung. And when you trace it back far enough; your retirement fund probably took the big hit.

My point is, you will see what you want to see.

From here, we might just question more critically our observations of the world about us. Reality for the individual is all about perceived perception. It is real and different for each individual. To the group, it may not be. Hence the reality, "I could be wrong!"

It sure feels nice not to have to be right all of the time!

The Solution is Too Simple

Just listening to CNBC again. Some ethanol producer was stating that ethanol production will save the importing of 480 million barrels of oil. The logic sounds great, but what if you were told that it takes more than a gallon of gasoline to produce a half gallon of ethanol. Here is a link to some hard facts. Why don’t we just stop growing corn for ethanol production? That ought to save about 960 million barrels (using his figures).

Why feed cattle? A farmer can make more money planting corn for ethanol production. It gets worse; the price of ethanol has all sorts of government subsidies. There is money to be made. Congressmen are hanging all over this one. They will save America from high priced oil. Notice that no one has ever accused a Congressman of being intelligent (you know they would deny it). But being crafty is a different story.

If everyone decided to take two steps backwards for every step taken forward, we would all be walking backwards to get to our destination. It just goes to prove that economics and common sense don’t mix. The economics floats to the top.

The real neat thing is that you pay more for less and feel good about it.

The Recession has been canceled

Just finished watching the CNBC interview with the Presidents economic team. After viewing that, I think that its time to seriously start shorting fertilizer futures. The good news is that there isn’t going to be a recession. The bad news is that only one or two economists has ever predicted a recession and been correct.

They claimed the employment figures were good and production was up. What do we produce besides drywall? Everything in our home that we have bought in the last five years has a label with the words “Made in China.” Of course food items don’t count but we do still produce most of them. Instead of stuffing corn in cows, we are making ethanol to put in your car. Your t-bone steak went to $10 a pound so you could corrode the hell out of your fuel lines, go figure!

The funny thing is, if the President’s economic team was to predict a recession, no one would believe them, just as they don’t now.

Housing literally walked into an open manhole. The increase in oil prices is the new Arab income tax. And the financial community claims that the smoke is necessary with all the mirrors they are using.

One of the group, Mr. Hubbard, also stated that inflation was “very, very low.” Here is a link to the interview transcript.

So I’m glad that's out of the way, there will be no recession. The Presidential "Sages" have spoken.

Google, Absurdum

I figured that we ought to touch on some real “bat guano” here for a bit. Google has gone hyperbolic and it is reminiscent of another stock back in the last big melt down.

RCA started off in the stock market in 1921 at $1.50 a share and in 1929 rose up to $549 (if you don’t figure in the 4 for 1 split in 1929). Remember that back then Joe Six-NO-pack (prohibition) paid about $15 per month rent. 549 bucks was a hell of a lot of money. RCA did not pay a dividend (you don’t need one with that sort of performance).



Fast forward to today and we look at Google the "Wunderkind" of the stocks market. If we carry the comparison back to 1929, a Model T ford was $400 so you are looking for a Beamer or better in today's market. That would be a stock price of about $28,000 a share. I guess we are not there yet. The peculiar thing about the Google graph is that the scale is extremely misleading. If you reversed the horizontal and vertical perspectives, it would look like the first graph. (Graph courtesy of MoneyCentral.MSN.com)

The RCA visual aid also includes another bubble stock called AOL. They bought out Time Warner in 2000. What happened next to Time Warner could be best described as having to do with two well known products Astroglide and Preparation H. That affair pretty much ended after the star crossed lovers meld hit $15 on the stock exchange. Time Warner reassumed its "maiden name" and has AOL stuffed in a closet somewhere.

History describes how Sir Isaac Newton made a bundle on The South Sea Company in the 1620's only to reinvest back and lose it all. Even a year ago Google looked dicey. Here is a link to Googleiots an article from this blog a year ago (nothing much has changed).

When you add up what the company does and how easily it could be replaced for 1/20th of its market cap, its price is absurd. Nobody laughed when AOL bought Time Warner (and nobody has laughed about it since then either).

Maybe Cramer has a prediction for Google to hit $1000. Are we rich yet?

Economic Turpitude

Banks, hedge funds and what ever are taking billions of dollars in loan loss provisions. I have been suggesting for over a year, that a lot of this money may be coming from our retirement funds. Think about it. If your wife buys a new fur coat with your paycheck, now you can’t pay the rent, that is obvious very fast. If the wife turned a trick with the old geezer down stairs and bought the coat, you are stuck wondering how she did it. The reason I suggest Retirement funds, is that the losses suffered so far appear to affect no one. But bear in mind, retirement income funds deal with the future. Most people are not ready to retire so these funds should have plenty of time to recover losses (keep quiet, keep your job). The write downs are massive. Nobody even blinks an eye. What’s a 10 billion dollar loss? The perspective is beyond comprehension. This money has to be coming from somewhere. Whoever’s money it is, they don’t seem to need it--yet.

The money supply worldwide seems to be contracting. Usually this would imply a rise in interest rates. That doesn’t seem to be happening. Commodities are increasing in value, which could be an inflation indicator. If reserves are being added to the banking system, then this could explain why rates are not rising (using a truck is cheaper than using Ben's helicopter).

A lot of the new earned money entering into the economy is not being used to create new jobs, its being “invested” in financial instruments. Workers are not creating new product, investors are placing side bets on the financial markets. The profit is gone from home building industry. Investment in rental property is a losing enterprise. Consumption seems to be tapering off. Home remodeling appears to have hit the skids. Starbucks seems to be doing OK, you have to draw the line somewhere.

Interest rates are dropping but you can't force people to borrow money unless there is some sort of return (like a house appreciating at 20% a year). That would explain why the stock market as well as the commodity’s markets are still in play. Cramer the other night was forecasting Google at $750. Everything is still going up. The stock market had a little hiccup on Friday. Nothing to worry about, Google kept on ticking just like a Timex watch. Of course it can’t be a bubble, bubbles don’t get that big!

You have a bunch of banks forming a consortium to bail out the CDO and SIV holders . They are creating a new financial instrument called a "USA," which is short for “Up in Smoke Assets.” It ought to be a hot item if they can figure out a way to package it. It’s kind of like selling invisible goldfish. Give the buyer one or two extra for free, so he thinks he’s getting a real bargain and sell him some invisible fish food to boot.

The economy’s current condition reminds me of the embezzler and a millionaire taking a vacation at the same resort. The embezzler knows whose money he is spending. The millionaire has no idea that he is broke, but hey, everyone is having fun. Are we broke yet?

Arbitrage, Free Money

As markets continue to go straight up, arbitrage becomes more profitable. Suppose an oil refiner takes delivery of oil today at $70 purchased 3 months ago. Now on the day they take delivery, futures three months out for oil, are $83. Figure their cost is two dollars for storage and interest per barrel (over a 3 month time). They can make $11 ($83-$70-$2) per barrel without refining it, by selling a forward futures contract 3 months out. In this case, the oil refiner can make more money storing the oil than refining it. The company could still buy spot oil and run their plant at full tilt. Notice, a refinery doesn’t care what the price of oil is; they refine it at a set price.

With low interest rates, futures arbitrage is more profitable. Remember that forward future’s costs are determined by storage charges and the cost of the money (interest) tied up in the contract to its expiration date. In a drastically rising market, it is more tempting to take your current delivery contract and move it forward 3 months. It doesn’t matter what happens to the price during the three months, somebody else owns it at an agreed price. The arbitragers profit is locked in.

If the three months futures premium on gold was $35 dollars above the spot price per troy ounce, the arbitrage play would be to buy the gold and sell the futures on it. $35 times 4 quarters is about $140 per ounce profit. You can keep rolling the futures forward. If the bottom dropped out of the gold market, the arbitrager would deliver the gold and keep the cash. In this example he would buy 100 ounces of Gold for say $70,000 and sell the future contract three months out for $73,500. The $70,000 kept in the bank at 5% would have earned $875. This, plus storage fees, would have been his carry cost for the trade (gold is higher, I just kept the math simple).

The arbitrager would select commodities with high volatility. There will be more premium loaded into that contract. Remember he is not buying gold or wheat or whatever. He’s holding a commodity for promised delivery three months out. The premium is the paycheck. Here is where it gets interesting. A majority of the futures contracts are bought back before expiration. If the commodities stop going up, all of these arbitragers are going to deliver the stored product. This might be more product than the spot market would be comfortable with. Ergo big price drop.

There are three different participants, suppliers, arbitragers, and speculators. The suppliers and the arbitragers have the ability to roll their contracts forward. If the speculators are willing to pay more premium because of implied profits, notice what happens. Instead of the commodity for example oil, hitting the spot market, it is rolled forward three months by not only the arbitrager, but the supplier for a better return. So, if I have this right, you can be knee deep in oil and not have a drop to refine. Isn't that neat, I pay more now, for gas because it's more profitable to deliver raw crude three months in the future. Go figure!

Jim Roger's Video

Here is a link to a Jim Rogers video clip from Bloomberg. Its about 19 minutes long. I'm not sure how long this link will work, but it is very funny. The commentators are asking questions, but not listening to Jim's answers. Jim keeps his cool somewhat. I share his views on a lot of issues. The guy is well worth listening too.

Futures a Ticking Time Bomb

Suppose you own a gold mine and your cost of production is $500 per ounce and you know you can output 4,000 ounces a month. Let’s say the spot price for gold is $700 per troy oz. As a miner owner, you would want to lock in your price for product mined for delivery in 30 days. You would sell 40 gold contracts which would be a promise to deliver to the buyer 4,000 oz of gold 30 days in the future. In this example the Gold future is being used as an economic tool that guarantees the success of the mine even if the price of gold drops through the floor. The mine owner has locked in a price and taken the risk out of the business.

Suppose you don’t have a gold mine and you want to play the game. No problem. There are two exchanges the Comex and the CBOT. The margin requirement for Gold on the Comex is $2,700 per contract and maintenance is at $2,000 (FYI don’t use the CBOT, they screwed Bunker Hunt when he cornered the silver market in the 80’s by changing the rules).

As a futures trader, $2,700 controls 1 gold future 100 oz of gold worth $70,000. Notice that the buyer and the seller of futures don’t have to be connected to the product in the contract. Usually before the contract is due for delivery, it is closed out. If you went long and bought a contract you sell it and if you went short and sold one, you buy it back before expiration.

This is a zero sum game. For every winner there is a loser. Airlines are known to lock in their fuel prices with futures. So all we need it a buyer and a seller, we don’t even need product. This can be done with bonds, gasoline, wheat etc.

All we are discussing here are commodity futures, pretty basic stuff. Notice that they are created out of thin air. And no product has to change hands.

Take the S & P 500. Why buy all of the stocks and pay a commission? Go buy a future on it. Most futures probably only demand a 6% margin requirement. These are rather abstract financial instruments; there is nothing tangible about them. The margin on an S&P 500 full contract would be about $25,000 (depends on the broker) and it would control $781,000 dollars worth of stock. There is also the CME Mini S&P 500 futures contract, kind of a bike with training wheels for beginner day traders, which has a margin of $4,000. It’s 1/5th the size of the big one.

If the DJIA were to drop 2,000 points, which would be a drop of 240 points on the SP500 (forgive me for not calculating the loss) the naked sellers of the futures are toast. The margin maintenance call would be a real killer. Even if the market were to come back, you still have to meet the margin call. But if you read the boiler plate on your contract, you have already been sold out at an unimaginable loss without your permission. Gee Whiz can they do that??

I kind of remember reading that the crash of 1929 couldn’t have happened if the stock margin requirements had been set to more reasonable levels. (Yawn) believe that and I have another for you. The phrase "Parallels in history," comes to mind.

The other neat thing about futures is that they are tax free. But I didn’t say that did I? The government has no way of tracking them, so grab a future and have a good time. Be careful the end is near.

It's All Good

The Wall Street Journal came out with an article on write downs tied to mortgage debt Saturday. Their bar graph (left) displays about 20.7 billion in 3rd quarter losses. Washington Mutual with 1 billion of charges this quarter didn't even make the list. The amount shown for the Bear Sterns doesn't really reflect what happened when this mess started (BS had a 1.6 billion hedge fund bankruptcy). Of course Amaranth is long forgotten.

The above chart is mixing brokerage houses with banks. So these write offs or what ever, could be coming from several different places, bad housing loans, credit card debt and hedge fund investments. Don't worry everything is "contained." Yea, right!


Here's a list of the top world banks. The banks in the top picture seem to have a handle on projected losses if you compare their net holdings (left) to declared write downs (top). But this is just third quarter losses. So do we multiply this by four to come up with a yearly total? It sounds logically conservative and nightmarish. [Note: Morgan Stanley in the top pic and JP Morgan Chase in the one at the left are not the same company, the first is a brokerage house and the latter is a bank, they were one entity at one time]

HSBC wrote off 11 billion in March, Citibank plans to announce earnings October 15 and refers to earnings as "abysmal" in their news release last week. Two banks not saying much are Bank America, and JP Morgan. It could be an eye opener when they report quarterly earnings.

Now mix in 2.46 trillion dollars of credit card debt. Here is list of the top ten issuers of general purpose credit cards:

1. Bank of America
2. J P Morgan Chase
3. Citigroup
4. American Express
5. Capital One
6. Discover Card
7. HSBC
8. Washington Mutual
9. Wells Fargo
10.U S Bancorp


The puzzle is starting to come together. We know who the players are. Citigroup made all three lists, which doesn't sound too good. They might have company, if Bank of America and J P Morgan "measure up" in the next week or two when they announce earnings. The real problem is the three month time frame this mess transpired in. How can we believe that things are now OK?

The stock market is still going up, go figure. I guess you could call it herd (heard) mentality. Follow your favorite stock commentator over the cliff.

Models We Build and Use to Interact with our Enviroment.

Reprinted from June of 2006. I apologize, but of the three essays I've written in the last two weeks, they were too unfocused to publish.

A rather long title, and a concept that is almost transparent unless you look for it. Lets start with an example or two.

Clapping your hands keeps the elephants away. Its a valid model as long as no elephants show up.

A rabbit foot is lucky to hold. Also a valid model unless you are having a bad run of luck.

Stocks will always go up and we will get rich. Valid but more like a wish.

Gold is where to put your cash. Valid but arguable.

Mother-in-laws are good cooks. Arguable, but it is your world that you are viewing.

Real estate is a good investment. If it works, you will keep on doing it.

Now when you build your model that you use to interact with the outside world, it might include views on gun control, abortion, the environment, politics, religion and what ever.

In our thinking, (or lack of) each of us is unique. It is from this perspective that we are trying to live out our existence comfortably with the least amount of excess effort.

Some of us, because of the models we use, are becoming more aware of problems that may or may not be of concern anyone else.

Right now, the financial world (to me) seems poised to fall off of a cliff. The models and my perspective suggest that. But just as mine suggest that, another person's model may suggest a different perspective. The one thing that I can guarantee, is that every perspective will differ, some more than others.

Right now we are at a point in time where some of these models are starting to fail. For example, "Real estate is a good investment." This model worked for years, and now it doesn't sound so enticing.

There are two reasons for failure, the model has stayed the same and the environment has changed, or an elephant has appeared and hand clapping doesn't seem to validate the model. If your thinking has failed to recognize the change or your thinking has always been out of whack then the model was never really tested.

What really needs to be realized, what ever model you use, your goals are probably the same, to survive and exist comfortably. The way you go about it can be quite different than everyone else.

We may, or may not be, aware of the present possible failure of our model in the real world. This is just what happened in 1929. People were not stupid, they knew how to "turn a trick," the trouble was the game changed and their model fell apart

Perceived Reality reprinted

This originally appeared June 2006 and I thought it worth repeating.

Ever hear the story about the bum in New York City clapping his hands? When asked why he was doing it , he says, "To keep the elephants away." The listener replies, "There aren't any elephants in NYC!" The bum quips, "See, it works!"

In this case, the level of absurdity sets off warning signs and that casts doubt into your mind. But lets get to the not so obvious.
"Why rent and make the landlords house payment?"
"Owning a house is better than renting."
"Investing in Real Estate is the way to wealth."

People don't realize that the value and the validity of statements change over time. What was pure truth in 1964, is not so certain in the world of 2006. The human mind has a rough time with changes in perspective. We get stuck in a rut.

Go into your closet and make a mental note, "Tomorrow I am going to wear something I bought 20 years ago." Try it on. Does it fit? Would you feel embarrassed wearing it? Will it make you feel young again? Do you still like it? Did this exercise change your perspective about time a little bit?

A lot of our mental values fall into the same boat. We need to have the ability to realize that our perspective needs to change as we get older. Values that seem to be constant need to be re-examined.

Remember this, if something is repeated again and again as fact, then it must be true, and society will accept it as such. For 2,000 years people though the common house fly had 8 legs until someone decided to count them.

So how does this tie into The Great Depression of 2006? I am trying to point out, that you could get caught up in the coming mess, if your values don't change to accommodate the times, as they are-a-changing.