Thursday, July 31, 2008

How to Start Your Own Investment Fund

Cayman Islands are probably where to start. It’s about $2,300 to get set up with the proper paperwork. About 8000 of the world’s hedge funds and about 5,000 mutual funds work off of that island. Here is a how to link for the really serious at heart. This is kind of boggles the mind. The islands cover an area about 1 ½ times the size of Washington DC with a population of 50,000 people and has 500 billion in the bank. The thing I really like about this is that it doesn't involve duct tape or a handgun, and there is no jail time, it's all above board.

The total cost is under $3,000 in fees and that includes the cost of a post office box, such a deal! Advertising for clients will be your biggest expense. A printing of 1,000 to 2,000 prospectuses might cost around $10,000. Figure about 5 bucks apiece (copy someone else's that looks slick). The lead pipe cinch rule gives you an automatic 3% return on the mail out. So that would be about 30 to 60 new clients. Then as fund manager, you would mail out monthly statement telling everyone how much money they made. [Hint: pick investments for the news letter that went up for the month, a subscription to the WSJ wouldn’t be a bad idea.] The more earnings the client sees in their monthly statement, the eagerer they are to invest more ( tell your friends, we can all get rich). All that is needed is some decent software and a high end color printer, you can retire tomorrow. Balance the redemptions against new subscriptions. Gold, Silver, oil, and market shorting seem to be good areas of concentration lately. This isn’t a Ponzi scheme, because you can close up the post office box at any time and move away. Here is a more serious link about the mess if you are interested.

You can pretty well guess how this will all end up. The hedge funds will fade away worthless and the mutual funds could drop to 10% of their value like they did in 1930’s. Are you feeling lucky? Give it a try. It feels better when the money you lose belongs to someone else. Believe it or not investors are waiting in line to send you their cash so they can avoid paying taxes. Just maybe there is some poetic justice here.

Sunday, July 27, 2008

Let’s Define “A Depression” Reprinted

Here is a reprint from last year, May 13, 2007 that you may enjoy.

Let's define a Depression

It’s a drop in economic productivity for a length of time. Speculation comes to a standstill, and bubbles cannot exist. There is a tremendous contraction in the wealth of the whole country. The great money making machines (plural) will collapse.

People are beginning to see the housing bubble. The machine that is cranking out new houses, is still making a profit. Building contractors can easily undercut home sellers, no reason to stop yet. Sticky housing prices are a plus (to the builder).

The stock market has Google at $500 and no dividend. It will probably still go higher. I still laugh about the AOL Time-Warner take over. It was like John Paul Jones with the Bon Homme Richard against the H.M.S. Serapis all over again. Then there are hedge funds who hypothecate the whole mess. They seem to be making big returns. When money enters the market faster than the creation of new issues, then prices rise—-forever???

The IRA’s and Mutual funds are increasing in value because of the increase in share price. What you are looking at is not a return on equity, but an increase in the prices of the equity. For example if Google rises to $600 you have a market perception of its new worth. But if IBM doubles its dividend, this is a real return on an investment. A money manager would probably invest in Google over IBM, because the apparent gains from that investment strategy would bring more investors to his fold. (I could be shot for this oversimplification)

If you look at Detroit, houses are so cheap, that you can't build a new one at those prices. The builders are leaving. The stock market could go to the same extreme. In a crash, Investors would demand a dividend of $4 to warrant a price of $100. Otherwise why not put it in the bank. What we would be looking at, is a return to more realistic values for assets. Some comedian during the Great Depression quipped, "I'm not interested in the return on my money, but rather, the return of my money."

The collapse will be a massive redistribution of wealth, hitting the rich, not the poor. All of this hypothecated wealth would disappear. The million dollar cats, dogs and tulips would be marked to market. Paper millionaires would go up in a puff of smoke.

Decreased consumption, would lead to layoffs. This would expose the credit card bubble and threaten the banking industry, or who ever holds all of this credit debt. Liquidation would then be the final game.

If that isn’t enough, Congress will rise up and try to save us. That's the scary part! It's kind of like getting on an airplane and having an election, to see who's going to be the pilot.

Saturday, July 26, 2008

The Titanic Congressional Bail Out

Congress is using our check book to bail out Fanny Mae and Freddie Mac to the tune of one trillion dollars plus. There is something, hidden here, have you figured it out?

Right now, Freddie Mac and Fannie Mae are hot potatoes. A government guarantee doesn't make them smell any better. The general mantra is, “Let someone else own this crap.” Interest rates could jump to more realistic levels. That in turn could move the housing market into the deep end of the pool.

Some Republicans changed over to vote for the bill, indicating the situation is far worse, than anyone is letting on. This is nothing more than a “Hail Mary Pass for the End Zone.” Big money is moving for the exits. The losses are real, and still only the banks have lost money, the depositors have not (careful you can choke on that sentence). The financial system is in need of a massive injection of liquidity. The 150 billion dollar stimulus package was insufficient to do the job. We are looking at 17 trillion dollars worth of savings that are linked by fractional reserves to the hedge funds and Fannie Mae. The phrase “House of cards” comes to mind for some reason.

The world’s financial markets are contracting. Other nations don’t have our deep pockets (it’s their money in our pockets), few have government backing.

Are we playing a waiting game? Which country’s banking system will collapse first? Italy and Spain can feel the pain. China is also suspect; Communism and entrepreneurship make strange bed fellows. The failure of the Chinese banking system would “teach” their citizens a lesson; “Free enterprise sucks, socialism rocks!” Naturally we would be blamed for the misery created.

We could be looking at a worldwide financial meltdown. This financial contraction will reach everywhere. Our banking system can survive if people believe that their money is safe in a FDIC insured bank and leave it there. The trouble is, many people with US investments are foreigners. Leaving it as a deposit might not be an option especially if it’s over 100k. The first people in line will get their money; the last people in line get an education. So it kind of works out for everyone.

We have just started a game of musical chairs. Half of the deck chairs are gone and the band is still playing. I guess I'll sit back and enjoy the life boat races.

Monday, July 21, 2008

What’s Up???

For 3 hours this morning, I tried to short some financial stocks. I could not execute a single short trade. No shares were available to borrow. I just came from Karl Denninger’s Blog and he mentions the same thing.

Skimming through what he said, he suggested that the brokerage firms are banning shorts of the stocks on the Feds list. I also wasn’t able to short two financial stocks not on the list, so that may not be the case.

My thought was that there has to be an awful lot of people shorting the financials. Plus if there are no short positions available, the time is ripe for the stock to take off. One reader [Old gold bug] pointed out to me a while back, “When you are right too soon, you are wrong.”

I’m not sure what is going on here, but there is another possible play in motion. The big holders could be taking delivery of the stock. Once the stock is out of street name it kind of kills the broker’s ability to offer it as a short. There is a window of vulnerability here. How long does it take to get the shares delivered to the holder? They can't sell the shares until they receive the certificate.

I really don’t know what to make of it. If Karl’s suggestion is right, then there are going to be “Air Pockets,” where there are no buyers and you have 10-20 dollar drops. A lot of these stocks couldn’t survive half an air pocket.

On the other hand, if everyone is short the market; it is liable to take off.

The thing that no one really has said much about is the SEC changing the rules of the game. Last weekend’s rule change cost me some bucks. I’m getting ready to take my toys and move off shore to play.

Saturday, July 19, 2008

The Man Who Lived Through 1929 (Reprinted)

Here is a post from last year that you may enjoy. This one gives you a feeling for what may lay ahead. It offers some perspective as to what we may expect, this time around. prev. printed 8/31/07

Let's go back and picture a man from the 1929 era. He would have been born about 1890 and been about 40 at the time. His world had gone from horse and buggy to the automobile. Between 1908 and 1927 Ford had produced 15,000,000 model T's. In 1904 there were three million telephones, by 1915 you could call coast to coast (the cost was prohibitive). By 1906, the electric light bulb was commercially feasible to produce. Radio came into its own in the 1920's. By 1924 there were 3 million radios in use in the US. The airplane had come on line. It was used to speed up mail delivery; commercial aviation was still a few years away. Technology had turned his life into something new and different.

The banks were loaning money out, 100% financing, interest only, 5 year loans that had to be refinanced at the end of the term. Also, you could borrow any amount you desired from your stock broker just pay the interest. Buying stocks on margin (10% down) was the name of the game.

Another thing to come of age, was installment buying. GMAC was created in 1919 to help sell more cars, and it did just that. There had been a stigma attached to not paying cash and through advertising, it became more acceptable. By the eve of the great depression, it had become a way to acquire the American Dream. You didn't have to wait and save up for what you wanted, you could have it now.

From 1915 to 1930 we had been transitioning from an agrarian economy to a more industrialized economy. Technology had changed our way of life without any perceived realization of it by the general population. A farmer was 10 times more productive with modern machinery. Agricultural prices were dropping because of this over supply. The speculation that had been going on in farm land was unsustainable. A bigger farm did not increase your return on investment, just the opposite.

Things started to go bad in 1926 with the Florida Hurricane, land speculation lost its appeal (severe understatement). Then in June of 1928 there was a mini stock market crash, a precursor to the big one. In October of 1929 the big crash came and "rearranged" the financial markets. In 1930 Congress passed The Smoot-Hawley Tariff Act, which some claim was responsible for the unemployment rate climbing to 25% (over the next two years). Bank failures started to be a problem in 1929 only to get worse in 1930, 1,352 banks failed. In 1931, 2,294 banks bit the dust.

So what happened to our gentleman? If he had a 5 year I/O loan that was due for renewal, it wasn't renewed; the bank wanted and needed the cash. Result, the bank got the house. He stood a 1 in 4 chance of being unemployed. If his bank had failed, he might have no savings left. Anything bought on installment might have to be returned or a payment made on it.

He probably survived with memories of the rough times he had. People from that generation were seasoned with these memories. They acted differently as so to avoid making the same mistakes over again.

Today, in the world of 2008, the "group memory" of these people is no longer with us. Are we destined to make the same mistakes as they did so long ago?

The evolution of the Internet is comparable to Radio of that time. And Google stock isn't quite as high as RCA's stock got to, before the crash. Then, there was the installment buying and interest only loans of the 1920's, verses the credit card of today and the same old loan formula (use their money not mine).

Almost sounds like an eerie episode of The Twilight Zone, doesn't it?

Wednesday, July 16, 2008

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?

Sunday, July 13, 2008

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.

Saturday, July 12, 2008

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.

Sunday, July 06, 2008

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?