The Greatest Threat to Markets Since Lehman Brothers

Here’s an interesting article from Costas Bocelli, Editor of the Tycoon Report that I found well written on the subject.

When Japan suffered a devastating natural disaster in March of last year, it wasn’t the powerful 9.0 magnitude earthquake just off the coast that was responsible for the carnage -- it was the massive tsunami wave created by that large tremor that wreaked havoc and caused so much destruction.

Today the ground is shaking throughout the Eurozone with even greater intensity, and the epicenter is Greece.  

And here's the question:

If Greece does trigger a full blown financial earthquake by an abrupt and disorderly exit from the European Monetary Union, will a massive tsunami overwhelm the entire Eurozone and spark a global meltdown? 

The European sovereign debt crisis has been rearing its ugly head for over two years now.  They’ve tried to tame it with bailouts, fiscal austerity, long-term liquidity operations and sovereign bond purchases.  But the patchwork and masking tape used to paper over the problems just doesn’t seem to stick very long.

Now, faced with the real possibility that one of its members may actually leave, it brings a whole new set of variables into the equation that could pose a bona fide systemic threat to the entire European banking system.

The real systemic threat is not the financial shock of Greece defaulting on its debt and parting ways.  No, it’s the potential financial tidal wave that their departure could trigger.

If Greece does exit, the Eurozone can absorb the messy divorce and eat a 500 billion euro loss or so.  It wouldn’t taste too good, but the $15 trillion economy could pinch their nose and swallow it.

But the ramifications and reverberations will likely be profound, especially along the debt-strapped periphery, including the beleaguered countries of Portugal, Ireland, Spain and Italy.

We’re already starting to get a glimpse of what may yet be to come, and could in fact turn into a full blown financial crisis.

Let me explain...

The actual makeup of Greece’s coalition government has yet to be determined, which is creating a great deal of uncertainty and speculation, not only for global markets, but for the Greek people.  Upcoming elections slated for June 17 should hopefully bring clarity as to what type of government will materialize and the likely fate of its EU membership status.

But the Greek people aren’t taking any chances.  With the potential threat of an exit and a forced conversion back to a national currency that will significantly devalue overnight, the citizens are withdrawing their Euros from Greek banks in waves.

Just last week, after a failed last ditch effort to form a coalition government, 700 million euros were withdrawn in one day -- a mini bank run, so to speak.

The primary reason why you get a run on the bank is simply because of a lack of confidence... when people simply feel that their money isn't safe and secure.

The effect was also felt last week in Spain as reports indicated that 1 billion euros were withdrawn from Bankia, the troubled Spanish bank that was essentially nationalized earlier this month.

While the amount of withdrawals are still relatively small to the aggregate, the thing about a bank run is that it can escalate very quickly and easily get out of control.

Like I mentioned earlier, the Eurozone and the European Central Bank are continuing to provide the needed liquidity to the Greek banking system, which is suppressing an all out bank run.

But if Greece is allowed or forced to exit and converts back to a national currency, it will set an awful precedent and signal to the other beleaguered members that if this budget austerity thing gets old, we’re going to follow Greek playbook and find the nearest exit.

The mere speculation of this option will only amplify the mini bank run we’ve seen this past week.

This is the scenario that could send the markets reeling and into a Lehman style tailspin.  It’s also the challenge that the Eurozone leaders must address -- and soon.  Losing the confidence of the people will not so easily be overcome by how much additional liquidity they can throw into the system.

One recent idea floated around was for the European Central Bank to simply guarantee deposits in all Eurozone banks.  After all, it worked in the U.S. during the height of the credit crisis by raising deposit insurance guarantees to $250,000 and preventing money market accounts to break below par value ($1.00).

But the major contrast is that the US is one sovereign country, while the Eurozone is comprised of seventeen.  While the US is carved into 50 separate states, one cannot pick up and leave and set up another currency.  (Though it was attempted back in the 1800’s, but that's another story.)

The Eurozone deposit guarantee would work in a sense if the people knew that an exit was not possible.  But if Greece is shown the door, that sense of security loses all credibility.

They could still choose to guarantee the deposits even if a departure was permitted, but Germany would never go for that.  In the event of another exit with a Euro deposit guarantee, the newly converted currency would quickly devalue, and the insurance claims would explode.  Having to write a massive check to depositors in a country that just left would not sit very well in Frankfurt.

Greece is indeed a small cog in the wheel, with current deposits around 170 billion Euros, a number that poses no real threat in a vacuum.  But if contagion and a break down in confidence spread to Italy and Spain, this is where the Lehman style systemic threat truly lies.

Deposits in Spain and Italy total just over 3 trillion euros -- a massive amount, and a sum that must be protected from a bank run at all costs.


What’s the Solution?

I’m no Eurocrat or a European central banker, but to me the solution is quite simple.

The message at this week’s EU summit in Brussels should be pretty clear:  The Eurozone is the roach motel -- you can check in, but you can’t check out!

Don’t let Greece leave!  Like the Union did not allow the Confederate South to willingly secede.

That is probably the best option and, in my opinion, the way it should play out.  It will no doubt come with another program for Greece that should roll back some of the fiscal austerity and appease the newly elected coalition government and its citizens.

Markets should rally if this scenario indeed plays out, especially as global markets are oversold.  Most of all, the bank run threat should subside and if they choose to implement a Eurozone-wide deposit guarantee, it would hold a tremendous amount of credibility and work very well.

However, if Greece does have a disorderly exit or is allowed to leave, then you must consider a Eurozone bank run as a potential threat and have a plan to protect your portfolio if the price action continues to deteriorate and breaks very key levels of broad support.

I’m following this story very closely, and besides watching the AP wires on deposit withdrawals throughout the Eurozone, I’m watching the Euro/USD currency pair.

The Euro just touched a fresh July 2010 low, breaking below 1.26 yesterday.  If withdrawals happen to escalate and the Euro breaks the 1.19 low made in June 2010, the tremors may very well send a financial wave on shore. END

 

 

 

How Markets Don’t Work!

It's funny how the markets work.  Everyone expects one thing, and the market does the exact opposite.

Case in point:  The US gets its national credit rating cut, and every US Dollar bond and US Dollar bear in the world figures that this is it... this is the big one... finally, interest rates are going to spike higher!

WRONG!

Since getting the credit rating cut from AAA to AA, we have seen the US Dollar remain fairly steady, and US Government bonds have rallied huge!  In fact, intraday on Tuesday 9^th August, 2011 we saw 10 year bond yields go below the 2008 low, all the way down to 2.036% - resulting in higher prices. WOW!

You have to think about this now -- why would bond yields go lower than the 2008 low? What could possibly be looming on the horizon that is so awful that bond yields would pierce the low set during the greatest market meltdown since 1929?

In a word, RECESSION.

The Fed pretty much came out and confirmed this thesis when they said that they would keep rates at ultra low levels until at least mid 2013!!  That’s almost two years away. WOW AGAIN!  Do you know how bad the internal data must be if the Fed is publicly acknowledging that they will not raise rates for 24 months?

So How Low Can Rates Go?

The irony was not lost when, after S&P announced that it was cutting US credit rating, China publicly blasted the US over its "bloated welfare costs".

Imagine that -- a communist country putting America down for being too socialist!

The funny thing is that, since the USA lost its AAA rating, bond prices have soared in value. In fact, over the last three days the Chinese have seen their Treasury holdings appreciate by tens of billions of dollars. (bond prices rise when relevant market interest rates drop)

For all their tough talk about how reckless the Fed was being when it announced QE2, they must have been secretly high-five-ing each other as their 1.16 trillion dollars worth of Treasuries appreciated in value by an estimated $100+ billion!!

Since QE2 was announced, we've seen 10 year yields drop from 4% to 2%, and we've seen much steeper declines in the 2-5 year duration, which is where China has MASSIVE exposure.  So that $100 billion gain guesstimate could be very conservative indeed.

Did QE2 Work?

It sure did!  Just not for you and I.

In fact, I know you have been asking yourself who benefited the most from QE2? After all, equity investors certainly didn't win... the average US worker didn't win.

You want to know who the winners were?

The only winners were Government and other bond holders.  And by the way, want to know who the two largest holders of US government bonds are?

YEP! It’s China and the Federal Reserve!

Want to know what's going on?  Just look around at who’s got the biggest slice of the pie.

It's no surprise that it was the Fed, and the US’s next single most important banker - the Chinese Government.  The US didn't break the 2008 yield lows on a fluke -- the market is telling us something.  It is shouting from the roof tops that we will almost certainly experience a recession in 2012.

While equity prices rebounded, after getting pounded so relentlessly again, I'll be looking to fade the rally and get short some more stock because unless we see a miraculous turn around in the employment and GDP figures we are going lower as far as equities are concerned anyway.

But we may go to 1,250 on the S&P 500 first before we see 1,050.  So, nimble traders: have fun.  Longer term traders: wait for the roll over, at which point you'll be able to short 'em all.

In the meanwhile, I’m getting longer on secured corporate bonds from entrepreneurial corporations in Asia. 

Volatility Trading Myths!

The VIX volatility index is supposed to be a proxy for volatility. However, when it comes to the VIX, nothing trades quite like you think it should. 

Don’t Believe All the So-Called VIX Experts. According to an article by Adam Warner in Investor’s Place - "Ten years ago, most people hadn’t even heard of the CBOE Volatility Index, or VIX. These days, the “fear index” is covered by the mainstream financial media, and you can’t throw a stick without hitting someone who fancies themselves a VIX expert."

The problem is that half of these people don’t have any clue what they’re talking about. So there is a lot of misinformation out there surrounding the VIX and VIX trading products, including futures and ETNs. When it comes to trading the VIX, nothing moves quite like you think it should.

To clear things up a bit, here are eight VIX trading myths you don’t want to fall for.

VIX Myth #1 – You Can Buy and Sell the VIX

Reality: You cannot buy and sell the actual VIX. You can buy and sell VIX futures, but that is a very different thing. VIX futures can trade at premiums or discounts to the VIX. In fact, they almost always trade at premiums to the VIX.

VIX Myth #2 – You Can Own the VIX Via Futures

Reality: VIX futures cash out when they expire based on a VIX settlement price. So unless you roll out, your position will vanish.

VIX Myth #3 – A Rolled Position Will Track VIX Moves

Reality: VIX futures price based on where the market expects to see the VIX on a given date in the future, i.e, the day the VIX expires. That estimate may or may not move on a given day with a move in the VIX. The further out in time the future is, the less it will track VIX moves.

VIX Myth #4 – VXX Tracks the VIX Better Than Futures

Reality: The iPath S&P 500 VIX Short-Term Futures ETN (NYSE:VXX) is an exchange-traded note that is based on a hypothetical rolling 30-day VIX future and trades like a regular stock. However, it does not track VIX moves particularly well. In fact, it underperforms over time so long as VIX futures trade in an upwardly sloped term structure. And VIX futures virtually always trade that way.

VIX Myth #5 – You Can Chart VXX Like a Stock

Reality: Since VXX trades like a stock, you may think you can chart it like a stock. Wrong. Run, don’t walk, from anyone who tells you about a key chart point on VXX. The VIX is a statistic, and VIX futures trade based on estimates on a forward price for that statistic. VXX creates a hypothetical constant duration 30-day VIX future and, therefore, loses money each day simply rolling from the nearest month future to the next month out if the next month out trades at a premium. Hence VXX is really just a number relative to itself the day before. It’s the tail of a tail of a tail of a dog.

VIX Myth #6 – Holding VXX Can Protect a Portfolio

Reality: VXX works fine as a short-term trading vehicle. On a day-to-day basis, it will track about 50% of the VIX move. However, it is terrible as a portfolio hedge for the reasons listed before, namely that it loses money over time in an upward sloping VIX term structure. Owning and rolling two- to three-month VIX futures works better.

VIX Myth #7 – VXZ is a Good Portfolio Hedge

Reality: The iPath S&P 500 VIX Mid-Term Futures ETN (NYSE:VXZ) is similar to VXX, but it tracks four- to seven-month VIX futures instead of 30-day VIX futures. VXZ has done relatively well since its inception and has outperformed VXX by a wide margin. But while it doesn’t have the contango trouble of VXX, the VIX curve gets pretty flat out that far. I would also caution that VXX and VXZ only listed in January 2009, and thus, neither has had to show its mettle through a VIX storm. Four- to seven-month VIX futures almost always hold their premium to the VIX, but would move to a significant discount in a serious VIX explosion. In 2008, they lagged by 20-30 points. So I suspect VXZ would not provide great protection when you wanted it most. It’s a fine volatility proxy in a quiet market, but if the goal is insurance, it may disappoint.

VIX Myth #8 – High VIX, VIX Call Buying is a Signal to Get Out or Get Short

Reality: I don’t agree with the above, but I can’t actually prove it wrong. I will say this though, the VIX is a mean-reverting statistic. A high VIX and excessive VIX call buying (and actual SPX put buying) represent extreme nervousness and/or bearish sentiment. In theory, that’s a time you want to buy, not sell. But take that with a grain of salt, because trends do take on a life of their own, like the VIX explosion and market implosion of 2008.

If you really want to trade volatility you’ve got  to trade VIX products. Email me for details.

Is it time to buy the US Dollar?

There are riots in the streets of Greece, which now has the lowest credit rating of any sovereign nation on earth. Remarkably, the Euro Zone has managed to weather the storm quite well.  Whether it can continue is another matter.

The European Facade maybe Crumbling

A look at the US Dollar Index and the US dollar / euro exchange rate certainly points in that direction. As bad as things appear to be in the USA, Europe seems to be more worse off. 

The European Union is made up of 17 countries who speak different languages, have different customs and have varying degrees of work ethics and national productivity levels. 

As split as the US is between liberal and conservative views, the people are still all Americans - even if they come in all shades and shapes.  As such Americans have far more in common with one another than the 17 nation Europeans do.  If one of the states in the  USA gets into trouble, people won't be rioting in the streets if the Federal government decides to bail them out.

Now let’s consider it from the European point of view: If you are the German Chancellor, how do you defend the diverting of your national wealth to support a country such as Greece, when your electorate holds the firm view that the Greeks are neither as hard working nor as fiscally responsible as the average German? Correctly or not this appears to be the view reportedly held by much of the German public.

This puts Angela Merkel in quite a political situation. If the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) follow Greece, it would be a miracle if the European Union survived intact. This fear is what has been behind the bull market we have seen in US bonds over the last six or so weeks, because, on a relative basis, US Treasuries still look like a much safer bet than EU Sovereign debt.

So, how can we benefit?

I know it's in vogue or even cool to be totally negative on the dollar, but to me, the dollar looks like it wants to rally. The US Dollar Index (DXY) is a basket of 6 currencies measured against the US dollar.  The biggest component by far is the euro, which makes up 58.6% of the index. Any drop in the euro will push up the value of the dollar, which in turn will drive the US Dollar Index higher.

If we get a real increase in Euro-related fear, we could easily see the US Dollar Index hit 80 - 81. Those looking to go long the dollar could do so by either buying the front month US Dollar Index futures contract (DXU11), or via the Bullish Dollar ETF, symbol UUP. 

So if I’m going long, I would use a break below 74.50 on the US Dollar Index as my stop point. In fact, if the US Dollar Index breaks that level, I'd be inclined to switch my entire strategy and look to going short for a  bit.  Anybody who tells you that they know with 100% conviction what the future will be is either fooling themselves or attempting to con you into something nasty.

Another way of playing a rising dollar is to take some bets directly against other currencies. One such currency is the Australian Dollar. I doubt if there is another developed country (except maybe Canada) that is more leveraged to the price of commodities. Remember, global commodities are priced in US Dollars -- if the value of the Dollar goes up, commodities typically go down. As commodities go down, the value of the Australian Dollar will typically decline as well. I would go short the Australian dollar in the futures market. The symbol on the front month contract is ADU11.  I'd use a move above 1.0730 as my stop if I’m short, with a price target of say 1.0275.  Alternatively, I could use the Australian Dollar currency ETF, symbol FXA.  If I’m using FXA to go short, I’d be sure to track the movement of the front month futures contract. I’d use the levels in the actual futures contract to trigger any profit taking and stop loss decisions in the ETF.

Remember, the whole world is looking for the US dollar to collapse into oblivion. I don’t consider it likely that everyone will be right. May the trend be with you always...

 

 

 

Using Whisper Numbers for Earnings Trades

There are a number of factors that affect post earnings price movement. Some are quantitative, some qualitative, some tangible, some intangible, some technical, and some fundamental. We consider 'investor expectations' to be the most influential and critical factor to understanding and anticipating post earnings price moves.

Let us first define what we mean by 'investor expectations'. Investors (professional, institutional, and individual) determine market direction. Some have more influence than others, but collectively, their expectations of stock price, stock direction, revenue, sales, etc. define the market. If investor expectations (real or perceived) of a company's future were bleak, the company stock price may suffer. If investor expectations (real or perceived) of a company's future were strong, the company stock price may surge.

It is the same with corporate earnings. When a company reports earnings that exceed investor expectations, the stock is rewarded. When a company reports earnings that fall short of investor expectations, the stock is punished. The simple fact is that expectations create surprises, surprises create volatility, and volatility creates opportunity.

How To Best Utilize Whisper Numbers: A number of investors have asked how to best utilize our data. First, in order to make the best trades investors need to be aware of as many factors as possible that can affect market moves. So aside from doing your own 'homework', it also means understanding investor expectations (whisper numbers). We'll restate something from a recent report: 'What we do know for sure is that company stock prices continue to react to beating or missing individual investor earnings expectations (whisper numbers) on a more consistent basis than analysts estimates.'

More often than not when a company misses the whisper number the stock is basically 'punished' and will see a decline in price over a one to thirty day period after earnings are released. And on average when a company beats the whisper the stock is rewarded and will see gains over a one to thirty day period after earnings are released. It is a simple process that should not be over thought.

Let's take a look at Research in Motion (RIMM) from the recent second quarter of 2009. They reported on April 3rd. Analysts expected 84 cents, investors had a whisper of 81 cents. If you expected (or hoped or guessed) that they would beat the low whisper you may have entered a long position prior to the release. You may just as well have expected (or hoped or guessed) that they would miss the expectations and enter a short position. Therein lies the 'risk'. You don't know whether or not they will beat or miss the expectations.

So how do you eliminate the additional risk of guessing or hoping the company will beat or miss the expectations? Simple, just wait until after earnings are released. RIMM reported earnings of 90 cents, topping both the analysts estimate and whisper number. Our data indicated that within thirty trading days following earnings, Research in Motion averages gains of 13% when they beat the whisper. If you waited until after the report you entered the market around 59. Within thirty trading days the stock was up 19% exceeding our expectation.

In fact, companies that exceed both the whisper number (from WhisperNumber.com) and the analysts estimate see a 2.5 times greater positive post earnings price move than companies that only exceed the analysts estimate but miss the whisper.

Does it always work this way? Absolutely not. But historically the data has proven itself more accurate in predicting stock movement than analysts estimates (which shows no definitive cause and effect).

Obviously knowing which companies are most likely to react to beating or missing the whisper number has added value. Having a target timeline, target price move, and advanced knowledge of this data with email alerts adds even more value.

You could spend years collecting and analyzing your own data, and coming up with an analysis of best 'whisper reactor' companies. (Anticipating price movement is not easy, and there can be no guesswork involved.)

An interesting website - WhisperNumber.com does this analysis and puts together those companies most likely to see price volatility according to whether or not they beat or miss the whisper in a service called the Whisper Reactors.

Of course members of Richman's International Millionaire's Clubs may get the real inside scoop from corporate insiders who are also club members...

The Toughest Investing Question is When to Sell?

Here is an article first published on the RAOMABO (Research and Analysis of Merger and Buyout Opportunities) Website that I think is interesting and relevant in these times:-

We considered various issues and decided on five signals that will warrant a reason to sell a Stock if you owned it or even sell short if you don’t own it...

As the sage of Omaha - Warren Buffet puts it, it’s often, “easier to figure out the losers.”

Referring to the automobile industry, WB points out that although it was one of the the most important inventions of the 20th century, it was very hard to make money as an investor in the industry. Thousands of upstart automakers failed. So the easiest money to be made was on the short side…

Today, we’ll concentrate about individual “loser” i.e. companies that are likely have more downside ahead of them than upside. We’ll see how it is often easier to spot these than the next winners, specially in a market with so much head wind against it ... like today’s markets.

We’ll also look at selling some of your former winners. These are stocks that may have made you good money but are beginning to show signs that you’re better off selling them than holding on to them.

Essentially it all boils down to the most important question in investing: When to Sell?

We’ve found that there are some major red flags you can use to get out of a long position… and go short a stock you don’t own, as well…

Red Flag # 1: High Valuations without High Growth

If you had the foresight to buy a small coffee chain named after an obscure literary character, you would have rode through some fantastic profits. All through the 1990’s and even through the tech-bust, it seemed like Starbucks would never cease to open more stores.
Around that time a Starbucks started opening across the street from another Starbucks, though, it was time to get out. Their growth prospects have been hammered. Other coffee chains are after their alluring market share. Even fast food chains have entered the business.

Today Starbuck’s balance sheet looks like a wreck. Let’s take a quick look. With a trailing P/E of 127, the company fails to pass an analyst’s first evaluation of a company’s value. The profit margin is less than 1% and the operating margin is 5%. Debt is three times cash. Return on equity, one of our preferred valuation measures, is 3.5%. Clearly, yesterday’s winners can become today’s losers.

Red Flag # 2: Technological Changes Taking Away a Former Competitive Advantage

Change is the only factor that’s constant in investing. Technological changes can make an entire company or industry’s products obsolete.

That doesn’t necessarily mean to go long the new technology. You should just avoid the obsolete one, or even short it as it dies off. Within the auto industry, we’ve seen technological changes that are partially responsible for the sad state of American automakers.

Toyota Motors was the first to market hybrid vehicles — namely its flagship Prius. The rest of the industry has been playing catch-up ever since. Sure, foresight is imperfect, and entrenched interests kept American automakers from fully adapting to this threat. But the solution wasn’t to go long Toyota; it was to stay away from General Motors, Ford, and Chrysler. Add in their uncompetitive cost structures, and it’s clear who the losers would be in this industry.

Red Flag # 3: The Company Begins to Use Questionable Accounting

Reading boring financial statements may tell you if you’re invested in the next Enron or Worldcom. Bad companies try to hide poor performance with financial gimmicks. One of the biggest things we’re looking at in the current investment environment includes companies reporting profits substantially in excess of reputed analyst expectations.

If such gains come from cutting costs, like firing employees, then the numbers being reported aren’t going to be sustainable over time. It’s the opposite of real sales growth and it’s a way of hiding a decline.

A lot of service-based companies are guilty on this count in recent quarters, from retailers to restaurateurs. Think of it as mold that people mistake for green shoots. It’s just too toxic to invest in.

The other major accounting areas to look at in this earnings environment are receivables and inventory. If Accounts Receivable is rising, there could be a problem with customer’s ability to repay... or there’s a problem with lax credit to customers to buy products. Either way, it’s one of the most obvious red flags you can see without. Eventually, toxic AR has to be written off. And the imaginary gains have to become real losses.

Rising inventories are even more problematic. A store offering this year’s fashions at 50% off may be able to post some good sales numbers, but over time it’s a recipe for disaster. Deeper and prolonged sales shorten the life of the business as lower margins choke off cash flow. Think Circuit City, Linens and Things, Mervyn’s and a host of other retailers. The retail industry’s problems are not over by a long shot.

Red Flag # 4: Divestiture to Meet a Cash Crunch or Burning the Furniture for Heat

Companies worth owning for the long- term don’t need to issue new debt right now. They certainly don’t need to go to the capital markets and issue stock to shore up reserves, either.

While this clearly applies to all the household-name financials, other companies have quietly been raising capital in the midst of this bear market rally as well. Any company that has to sell off assets or divisions right now is one worth reevaluating. Even in the absence of the worst credit crunch of all time, it would still be a very red flag.

Within this category insider selling is worth a mention. It’s a form of raising equity - only it benefits management and not the company. Certainly non insider the shareholders don’t benefit. Combined with other red flags, it’s the closest thing to a leading indicator we’ve seen that a stock is going to fall. Be especially aware of multiple insiders selling.

Red Flag # 5: Key Related Industries Are Suffering

There’s more than one way to make a profit. In investing, the term ‘pin action’, stolen from bowling, means that if one industry is on fire, related industries will share the heat as well. The same thing applies when it’s time to sell.

Watch the Flags...

Take a good hard look at the positions in your portfolio, and the major positions in any mutual funds you own. If your rationales for buying no longer apply or if any of the changes listed above are occurring, you might want to take some money off the table.

After a run-up, is the perfect time to re-balance your entire portfolio — to reduce risk by getting out of toxic assets and into better ones. When the market comes crashing down again, you’ll have more capital preserved to invest in companies that are innovative, growing, diverse, and ethical—and still have some left over to short the losers.

Michael Jackson Dies at 50!

I read the shocking news of Michael Jackson's death of unknown causes yesterday in Los Angeles.

Notwithstanding all the stuff we've heard about MJ's private life, he remains one of the best entertainers the world has ever known.

Michael has been one of my favorite singers and will continue to be so. I mourn his death and ask that we take a moment to say a prayer for Michael. God rest his soul! Read the full story from Yahoo

Luxury Industry Poised For 2011 Recovery

"Conspicuous consumption isn't dead, it's just been on hold. The luxury consumer will be ready to spend again within the next year.”

This view is shared by the Richman's IMC, the soon to be launched chain of International Millionaire's Clubs, whose memberships have been reported to be the world's most expensive private club membership...

Acccording to a story by Lauren Sherman in Forbes referring to the global consulting firm, Bain & Company's Luxury Market Update: 2012, which will be released tomorrow, the luxury goods industry is poised for full recovery in 2011.

The Bain & Co report is authored by Claudia D'Arpizio, a partner based in the firm's Milan office. The study covered some 220 luxury brands, which includes leather goods, fashion, jewelry, alcohol and cosmetics companies that serve high net worth customers, or those with assets of US$1 million or above.

Growth to return: The global luxury industry has seen steady growth for the last 15 years but contracted by just 10% in the first two quarters of 2009 to 153 billion euros (or $215 billion), compared with 170 billion euros ($238 billion) in the first two quarters of 2008.

D'Arpizio says this decrease does not reflect a permanent change in the spending habits of the luxury consumer. Consumers were tiring of the recession and will start spending more freely again within the next year and a half.

Some other key findings from the report:-

• Spending is expected to pick up again in 2011, with a full recovery in 2012. Global sales of luxury goods will stabilize in 2010 and increase by 4% in 2011 and by 7%-8% in 2012.
  
• Consumers in emerging markets like China, India, Eastern Europe and Russia will begin aggressively spending as soon as the stock market fully rebounds.
  
• China will see a 7% increase in sales of luxury goods in 2009. The less-developed interior of the country will see increases up to 35%.
  
• High-end shoes are still selling well because of their accessible price point ($400-$2,000) and perceived quality.
  
• Luxury brands whose core business is leather goods--such as Louis Vuitton, Gucci and Hermes will fare better over the next two years than those who focus on high fashion, such as Christian Lacroix.

While many luxury industry experts are in agreement that the sector will rebound in 2011, there are still others who believe that this downturn is different from others, and that consumers will permanently cut back on spending, particularly in the U.S. We shall see... Click here for the full story from Forbes...

Latvia’s Unique Economic Cheer!

According to The Sovereign Society’s latest Offshore A-Letter, Latvia is facing the worst recession of all 27 EU members.

As a solution to cheer up its citizens, Latvia has come up with the First Annual Blonde Parade. The LINK to The Sovereign Society is http://www.sovereignsociety.com/

Inflation is Not Coming...It has Arrived!

Don’t be deluded into thinking that inflation “might be coming” in the future and that once you see the signs you can protect yourself.

Inflation is already here. And if you wait too long to take precautions, this silent thief will most certainly steal your wealth and...more

World's Most Powerful Luxury Brands

In the continuing spirit of earlier blogs/messages on “Recession? What Recession!”, here is an interesting article by Lauren Sherman (as it appeared in Forbes), entitled “World's Most Powerful Luxury Brands”.

The article shows that despite the global recession, some luxury brands are retaining their value...more

A strategy for the new year!

Learn from Warren Buffett's dirty little secret …. He calls them "workouts."

You probably wouldn't expect the world's most successful value investor to come up with such a pretty euphemism for his forays into the world of distressed debt.

In his hedge fund years, from the mid-fifties into the late sixties, over half of Buffett's profits came from what he called ‘workouts.' These were special deals, mergers, and spin-offs that often involved trading large quantities of distressed debt. And in the decades that followed Buffett continued to trade in distressed debt, sometimes through "Private Investment in Public Equity" (PIPE) vehicles or arbitrage strategies.

Indeed, a good portion of Berkshire Hathaway's riches and Buffett's fortune has come from the distressed debt arena.

Most value investors would scoff at the idea of investing in distressed debt. But the Oracle of Omaha has a life lesson for these guys...

Warren was acting in accordance with one of the first rules of value investing...buy when there's blood in the streets.

And my friends, there's a tidal wave of blood on Wall Street right now. Especially in the fixed-income arena. Don't be surprised to see the Oracle making more of these subtle deals on distressed debt as the credit situation calms down in 2009.

Most investors have been taken over by panic. And now they're running for the hills. De-leveraging their own bets, minimizing their exposure and running for the safety of dollars and T-Bills. But in their uniform insanity, they're fleeing to ‘safety'...and not value.

Despite the credit-binge that’s lead to the current crisis, and atmosphere of craziness that’s permeating the investment world at the moment...take a page from the Oracle from Omaha and give some thought to the opportunities in distressed debt. END

Nationalize all banks and permanently solve the Global Banking Crises!

Extract of interview by Jayke Umarezz as appeared in various publications. Please also read comments and related articles at the end of this extract.

In an exclusive interview by Jayke Umarezz, Dr A S Johan revealed his views as to how he believed the current global banking crises could be successfully and permanently solved….so that the global economy may allowed to prosper again.

Dr Johan made it clear that, in his opinion, the world’s current problems can be clearly defined as problems caused by banking industry excesses.

“As long as banking is privately owned and run as a business for the benefit of its shareholding investors, as it has to be, we will continue to have this problem of excesses over and over again” he said.

He went on to say “Banking like healthcare, water, energy etc. is an essential service industry that people need to survive in order to be productive and contribute to a country’s economy. They have an overriding social purpose that cannot be achieved through a private, for profit structure.

Don’t be mistaken, as an entrepreneur myself, I am in support of capitalism. I believe capitalism is the only system that encourages productivity and savings. However, I also believe that banking and other essential industries like healthcare, water, energy etc. just cannot properly and honestly serve society in a privatized form.

If banks are run as privately owned businesses, they cannot avoid taking on greater and greater levels of risks and eventually reach the excess we now know about. Because, in order to survive, banks must produce returns, expand and attract investment capital. The current banking crises is a direct result of competition among banks.

In all fairness, we cannot blame bank management for doing what they had to do to stay competitive. In our misguided belief that competition in a social service like banking is good and more is better, we have once again shot ourselves in the foot….and in the process almost wiped out the savings and wealth of millions.

Bailouts through equity injection and purchase of toxic assets only serves to support the excesses of management and the greed of shareholders….at the expense of innocent depositors.

I believe that In order to restore confidence once again and this time to keep it permanent, each country really needs just one credible national bank whose customer deposits are fully guaranteed by the Government.

I propose that all existing banks registered in a particular country be merged into one large Government owned bank. Pre-merger, all current shareholders of these banks will be bought out at net asset value per share by crediting them for the sales proceeds with deposits in the new nationalized bank. Such a state owned bank may expand its operations to other countries if it wants to but the host Government will make it known that only deposits received and registered at their home country will be guaranteed and not deposits taken in at a foreign subsidiary or branch. The Government of that foreign country may guarantee the deposits of its residents with this foreign bank if it so wishes.

Directors of these new nationalized banks will be appointed by Government and held accountable for their decisions just as other Government appointed heads of departments are. Management and staff will effectively become Government employees with salaries and benefits similar to other equivalent Government employees.

I do not see any issue of service efficiency. If other Government employees like the police, immigration etc. can provide reasonably efficient services, I don’t see why banking staff cannot.

The new nationalized bank’s checking (current), savings and deposit accounts will be 100% guaranteed by Government as to principal and contracted interest. These new state owned banks will also offer basic home mortgage and business loans to its domestic customers on a properly collateralized basis, in line with each Government’s policy.

State owned banks will therefore exist only to provide basic deposit and loan services and will not engage in investment management services, securities brokerage, private equity, venture capital etc. Their cash surpluses will be invested exclusively in National / Federal Government Bonds and profits if any paid to their respective Governments as dividends.

Non deposit taking services like investment management services, securities brokerage, private equity, venture capital etc. will be offered by licensed and regulated investment and brokerage firms who cannot call themselves banks.

Businesses, corporations and investors who need these services and can afford the costs and risks associated with dealing with these firms, may do so freely. However, they will be told, in no uncertain terms, that their accounts with these firms are not guaranteed by the Government.

It may however be a good idea to establish a credible clearing house funded by mandatory, dynamic contributions from all such investment management services, securities brokerage, private equity and venture capital firms.

National banks who wish to expand their banking services beyond their national borders will only be allowed to deploy their foreign country registered deposits (which will not in any case be guaranteed by their home country Government) to finance loans in that country.

If they try to fund such loans through inter - bank deposits they will find other banks reluctant to extend large lines of credit for long periods in view of the non guaranteed status of such inter – bank facilities.

Each country’s national bank will only enjoy a rating equivalent to their Government’s credibility and the amount of their guaranteed deposits. This will discourage banks from expanding overseas simply for the sake of expansion.

In fact the relationship by one country’s Government postal service with other country’s postal service regarding the international delivery of mail through the offsetting of stamp sale receipts could be a good example of how the future of international banking relationships could evolve.

The recommendations I’ve made here with regard to banking will apply to other essential services like water, power, healthcare etc. as well. So let’s get back to honestly and fairly providing the basic services that every citizen needs and can all rely on.

No doubt there may be many out there who could have issue with my proposal. If so, please let me know your views and together we can try and create a safer place for our savings”. END

Following is a response and a related article from L.M. Arndt of San Rafael California:-

Dr. Johan, I am ecstatic! I just found and read your essay, "Nationalize all banks and permanently solve the Global Banking Crises!"

I totally agree with your conclusions, which I'm delighted to find dovetail with my own. In the course of articulating a similar argument, I happened upon your comments – a breath of fresh air in an otherwise dismal miasma of foggy thinking. I make no claims to expertise as an economist, but I have lived a few years, and paid at least some attention, and it has become increasingly obvious that the current banking system is fatally flawed – for the reasons you so cogently articulate. You also analyze precisely how a nationalized banking system would function. Your knowledge of the internal workings of banks far outpaces my own, yet we have independently arrived at the same conclusion, that, as you put it, “Banking, like healthcare, water, energy etc. is an essential service industry that people need to survive in order to be productive and contribute to a country’s economy. They have an overriding social purpose that cannot be achieved through a private, for-profit structure."

I respectfully submit the following, all of which I wrote before reading your essay. I would greatly appreciate any comments you may have. Also, if there is any possibility of a face-to-face meeting and conversation, please so advise.

L.M. Arndt, San Rafael California

Why would it not be a good idea for our government, i.e., We The People, to own and operate the banks in our nation? By L.M. Arndt

The banking “industry,” as we know, is not an industry at all and creates nothing of real value. Moreover, it requires, indeed demands, a constant infusion of money in order to cover the interest it charges.

Nevertheless, it provides an essential service, very much like other governmental services such as streets and highways, police protection, food safety, environmental quality, a justice system, and national defense.

Contrary to popular belief, the Federal Reserve, the “central bank” of the United States, is not owned by the U.S. government, nor is it a single “bank” but comprises 12 regional Federal Reserve banks. The system is, at least theoretically, controlled by a governmental agency, its Board of Governors, but actual oversight power is held by the Federal Open Market Committee composed of the president of the Federal Reserve Bank of New York and presidents of 4 other Federal Reserve banks, serving on a rotational basis. The regional Federal Reserve banks issue shares of non-tradable stock to member banks, whose stock may in turn be held by banks in other nations, giving rise to the claim that foreigners own the system. The governmental web site describes the system as “independent within the government.” If the original intent was to create a banking system separate from and uncorrupted by politics, history has amply demonstrated abysmal failure.

Until 1933, collateral to back up the nation’s money supply was the gold stored at Fort Knox, but the real wealth of a nation lies in its land and its people, i.e., the common wealth. Forests can be managed to produce a sustainable yield – or they can be mismanaged, with clear-cutting that causes erosion, silting of streams, and destruction of fish stocks. No tourist ever traveled to California to see Big Tree stumps.

So it is with farmland, streams and rivers, towns and cities. Poor farming practices, polluted streams, deteriorating buildings, all reduce the nation’s common wealth. So it is with the citizenry. Well-educated citizens are able to fulfill higher-level jobs and therefore are of greater value. Healthy citizens have a longer working life and require fewer medical services. Responsible, creative and engaged people make wiser personal and political choices and are of greater benefit to the nation. People who are in dire economic straits, suffering poor health, ignorance and apathy will fill our prisons and overwhelm our welfare systems.

For a nation to increase its “common wealth” requires a sensible, operational basic economic system. That we do not have, nor do most nations in the world. In the current monetary system in the U.S., banks MAKE MONEY by lending and then use the debt as an asset to lend more, on and on, which is what has brought this economic crash, not the first, I might add – and coincidentally has sucked up even more wealth into the pockets of the already very wealthy. Year after year, this system has redistributed wealth upward.

We desperately need a REVERSAL of the entrenched wealth-redistribution system!

So here’s my concept: Suppose that our GOVERNMENT, i.e., We The People, OWNED THE BANKS! Government, using our common wealth as collateral, would issue our currency. Yes, “national banks” would be “NATIONAL” banks, taking deposits, making loans, managing credit cards, etc. All the interest currently being siphoned upward into the pockets of bankers would be used to operate our government. That’s a tremendous amount of money, and I’m wondering if it might not be enough to SERIOUSLY lower taxes or even eliminate taxes entirely!

Under an economic system of truly “national,” i.e., government-run, banks, corporations would continue in business (although limited in size so that NO such entity becomes “too big to fail”). Entrepreneurs could easily get loans to start new businesses. Small companies could get loans for operation of their businesses. Ordinary people would have money to spend or save, credit cards would charge a reasonable rate of interest, and usury would become only an unpleasant memory.

Estimates of the bailout now nears $3 trillion. Rather than throwing it at privately owned banks and lenders, our government could buy controlling interests in smaller banks, those otherwise likely to be bought up by banking behemoths. With ownership of these banks, government could immediately begin to make loans and thereby ease the current credit crunch. We wouldn’t need the likes of CitiCorp with its usurious interest rates, punitive fees and charges, and its inherent arrogance and irresponsibility.

In order to have a truly healthy economic system, one that does not continue to redistribute wealth upward, we’d need to make some other corrections as well:-

• Raise the minimum wage,
• End subsidies to corporations that offshore jobs,
• Ban the practice of avoiding taxes by setting up offshore offices,
• Require that our government fulfill its traditional obligations rather than out-sourcing and privatizing (which the Bush administration has done in many areas, up to and including our military),
• Eliminate the special Social Security tax and put Social Security into the federal budget.
• Impose any necessary taxes on an equitable, progressive basis. (Even Adam Smith wrote that “It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”)

It seems to me that a fully nationalized banking system would introduce more freedom and more fairness into our society and that it would result in a truly healthy and sustainable economy.

An economy cannot continue to grow ad infinitum (nor can anything else, including population). If we humans want to continue our lives on Earth, we will have to begin to think about a sustainable future. End

An interesting article related to the subject....click here