Thursday, May 28, 2009

And so a Dark Secret is forced......

An except from "The 5" that I absolutely HAD to share. This is insane...

Last today, the government has released Treasury documents surrounding Oct. 13, 2008 -- the day the U.S. government launched TARP. After a long battle between Judicial Watch and the Obama administration, the government has finally coughed up some details of the infamous meeting between the Treasury and the heads of the U.S.’ biggest and most troubled banks. Oh, my… take a seat for this.

First and most interestingly, the documents show that Former Treasury Secretary Hank Paulson gave the nine bailed-out banks NO CHOICE but to accept the government’s cash-for-equity deal. “Your firms need to agree,” his talking points read. “If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance.”

What’s more, there’s all kinds of ridiculous Gestapo-style secrecy surrounding the meeting. Treasury officials asked for Secret Service assistance to keep the press in the dark. The White House launched a PR campaign to crush public fears of bank nationalization. And the coup de grace: In all the released documents, all remarks by current Treasury Secretary Tim Geithner are either censored or missing. After all, they have to protect their golden boy.

“How is it,” asks our executive publisher, Addison Wiggin, unable to resist, “that the Treasury secretary, chairman of the Fed and their minions have risen to the level of national security that the military has traditionally claimed?”

If you would like to delve deeper into this matter, some of the documents and transcripts can be viewed here.

The free market has failed us? It is being choked to death and that is why this recession will become The Greatest Depression - the damage the government will have inflicted by the end of 2009 will take a decade to unwind!

Tuesday, May 26, 2009

A little off topic - the future of green investments

I'm not exactly sure if this has ever come out fully in any of my posts but I am 100% a believer in the free market and I see daily examples of how government intervention cripples the progress of our economy and forces us to step backwards.

A great example is the current crisis we are in - newspapers for the last 7 months or so have been proclaiming "the death of the free market". Pray this is not so, because if it is we are in for a long era of utter poverty unlike anything seen in the last few centuries.

People just do not seem to realize the very obvious causes of the crisis: The Federal Reserve lowering interest rates to obscene levels to balance out the losses of the 2000 stock market crash, and politicians trying to extend their careers by offering handouts to tens of millions of people who under normal market conditions should never have gotten them. Some expensive votes, to be sure, in retrospect.

The Federal Reserve is at the very core of this crisis even though they themselves may be too blind to see it. It don't personally believe that but there are enough completely incompetent people in Washington and Ottawa (I'm from Canada) to make me double-think that every now and again.

Anyway, there is a very simple reason the Federal Reserve is the root cause and foundation of the massive excesses of the last 25 years, but especially the last 8. Insane low interest rates and massive amounts of cash injected into the market.

Why are low interest rates a bad thing and lots of new money even worse? Simple - the new money loaned out at these ridiculously low rates. What happens when interest rates are 1% is billions of dollars of malinvestment occur due to artificially low risk to service the debt. Many business ventures are started, investments are made, homes are bought, that should never have been purchased by the borrower.

An example - say I think a stock is going to go up 20% in a year because it is undervalued. But say it is in an industry that is receiving some political pressure or something to its downside - there is a chance this company is going to lose market share or even the capability to do business. Now if I am in a regular interest rate environment and I want to invest I might make a margin investment. Lets say I want to invest 100,000.00 in this company at a margin rate of 10%. That means that in a year the stock has to be up a little over 10% just to service the interest on my debt and transaction fees, etc. If the stock doesn't move, or worse goes down because of the downside pressure taking over, I not only have a negative equity in my asset, I also still owe $10,000 in interest!

But translate that into a low interest rate environment. The risk of the actual investment is exactly the same, the downside possibility hasn't changed, just the cost of my investment activities has been artificially lowered by Central Bank intervention. Say my margin rate is now 5% because of the Fed's low-rate policy.

Well now my downside risk had dropped in half and my upside possible gains have risen by 50% compared to the interest of my debt! I am much more likely to make the investment. In fact I'm more likely to make a lot of low-quality or downright bad investments because the cost of those investments is much much cheaper than it should be.

And that is what brought us to this crisis, in a nutshell. The Federal Reserve creating an artificially "low risk" environment that encouraged hundreds of billions to be invested in non-productive or very low production areas instead of more efficient and productive places - where the money would have originally gone had the rates not been manipulated but actually left up to the free market.

Couple that with shenanigans like the government trading Fannie Mae and Freddie Mac a government backing of their loans with the requirement that over FIFTY PERCENT of their loan portfolio had to be lent to high-risk people who normally couldn't get financing! And thus you have a tidal wave of new (and very artificial/unsustainable) demand flooding into the housing market sending home prices to the moon.

The massive excesses have been going on for the last two decades or more. In order for North America to be able to move ahead, the market needs to correct and reallocate the tremendous malinvestments to areas where they are more suited. But the government is not allowing that to happen - they are propagating the very thing that caused this whole mess, and until they get their politically-motivated hands off the process they are only going to cause much much more pain in the end. They are leaning the train precariously and soon enough they will push it so far it will derail. At that point a whole new train will need to be built!

But I have to tie this into green investments.

Here is the skinny:

  • The government is doing the same thing with energy that it did with housing, especially under the new "environmentally conscoius" Obama administration

  • They will be instituting a new "Carbon tax" which is just basically a way to take more money from your pockets and redistribute it as they see fit. Hence the global warming hoax, the fact that Al Gore's firm purchased $300 million of carbon credits shortly after he made his movie should be some sort of a hint!
  • Currently most "green energy" projects are partially subsidized by the government - most homeowners cannot afford a full solar system without the government grants offered. Or a geothermal system or anything else to get off the grid.
While this subsidation might seem good to the average joe or jane at first, one must truly look at the big picture and realize that the free market is being strangled as far as Green Energy is concerned. We would already be YEARS ahead of where we are now if the government was not involved at all.

Why is that? Simple. Most of these solar products are completely unsustainable without government subsidy. Instead of encouraging competeting between firms by letting the market dictate which company can make the most efficient and cost-effective product - by keeping their bloody hands off the market entirely! - the government actually stops dead the progress of development. By subsidising these inefficient products it does not encourage new development by these companies - they don't have to make new products because with the government's help they can turn a profit just fine with the ones they have, thank you!

And thus the potential leaps of green energy are turned into a weak shuffling and sometimes even stagnation. The funniest part of the whole thing is that generally governments think they are doing someting great by encouraging purchases in industries they like by offering subsidies. It's that damned rule of uninetended consequences that nails them every time.

Economics is a two-step or more measure of cause and effect. Unfortunately the government generally does a point-A to point-B analysis and everything is rosy. And maybe they can buy some votes along the way......


One good example of unintended consequences is a future prediction I am willing to stake a lot on. It has to do with the car companies in North America, their outdated and inefficient business models, and the fact the government will now own half of two thirds of the whole auto industry (50% of Chrysler and 50% of GM).

Here is something the government thinks is a great idea: Since they think people won't buy cars from bankrupt automakers (for good reason, I might add) they have decided to Back the Warranties of the car companies they own. This sounds great in theory, and unfortunately they will desperately need these warranties as the public soon discovers that the guys in washington are a lot worse at making cars than the experts in the private industry - geez whoever could figure a politician with no engineering background could build an internationally competitive automobile?!

But here is the unintended consequence - the government is backing these warranties to bolster the American Auto industry. This will actually result in its ultimate demise. The reason is pretty simple - it's just like what happened with Fannie Mae and Freddie Mac - when the government says they are backing something, anything goes - 100%. So effectively GM and Chrysler can warranty their cars for 500,000 miles bumper to bumper and the government will be flipping the bill!

Even funnier is the fact there is one automaker that still hasn't taken and government cash - Ford Motors. Guess what will happen when GM and Chrysler's warranties take on ridiculous properties? Ford will have to try to compete just to sell cars! But while GM and Chrysler can sit back and let the taxpayer flip the bill for their own warranty (ironic, isn't it?), Ford will have to absorb all of the costs of its own service. This will make it so expensive that they will have to bundle some of these future costs into the selling price of the cars making them much more expensive than the government subsidised prices of the Other Two.

While GM and Chrysler are and have been bankrupt for a long time (and will continue to lose money as long as the government and any labor union have anything to do with them at all), Ford will join their ranks as the unintended consequences of the government's actions will pound their sales into the dust.

Check back in 5 years to see if this happens because I already have a few cases of beer riding on this one lol!!!

Sunday, May 24, 2009

Mastercard will net us 500% or more!!! The US Treasury era is ending, and The Death of the Dollar.

Okay, so I still have some open positions and I've done a few trades that I don't think I have posted lately.

PST (ultrashort 7-10 year treasuries) has begun it's move up. It just hit the 200-day moving average. It has made a new high out of the huge drop a few months back when the Fed officially announced it would be monetizing Treasury Debt. This is the beginning of the end of the "bond bubble" that has been brewing beneath all the other bubbles for at least 2 decades now.

I suggest anyone interested in making a lot of money should buy the January '10 in the money Call Options for PST and watch this monster unfold. They are trading at about 4.50 right now but I can easily see PST hitting $65.00 to $70.00 by then if not more, netting you roughly $10.00 - $15.00 on your $4.50 spent. It could go even higher - it's hard to say but there is going to be extreme carnage in the bond market over the next few years and PST is one of the best ways to profit from it.

I have just opened up a new trade as of Thursday. Put options against Mastercard. They are October $140.00 Puts purchased at $7.35. The long term trend is looking very very ugly for MA and the fundamentals are looking even worse. Latest news is that JPM is moving a $59 Billion portfolio over to Visa so MA will be losing a significant chunk of transaction revenue. Not to mention that Net Asset Value on Mastercard is around $5 Billion and the Stock is trading over $20 Billion - 75% downside potential.

Here's a chart to show you what I mean:

The 50-week Moving Average is clearly in strong down-trend mode and the 50-week has JUST crossed UNDER the 100-week. A very very strong sign of long-term price weakness, sometimes referred to as a "black cross" or a "death cross" - get the picture? lol.

Just how low will it go? It's tough to say. But you can bet that this company will be a hell of a lot cheaper than it is now. And for good reason - the market seems to be currently pricing in a fairly low level of card default rates (keep in mind that unsecured debts like credit cards are wiped out when someone declares bankruptcy, so the company ends up with $0). But the default rates are assuredly going to be coming in much much higher than anticipated meaning huge portfolio writedowns and huge losses for MA.

My current price target in the time frame is $120.00 for the stock by September, which is when I plan to sell the options so I still get a time premium (For those of you unfamiliar with Options, check out This Link as a primer on what an Option Contract is. This trade is medium-term and should net a return of about 600% - 700%. I am trying to keep my USD positions to a minimum as the USD just closed below the 80 handle in the Index, which has been HUGE support for the last 6 or 7 months. In 10 years I doubt the dollar will even exist anymore! The Treasury is unloading $168 BILLION of bonds this week so I expect PST to be a lot higher by Friday. The of course will not be able to find adequate buyers for this grossly obscene amount of debt and thus the Federal Reserve will have to monetize it (i.e. print dollars from thin air to buy them. This will further debase the dollar and cause it's value to deteriorate drastically).

To all holding US$ in savings my only advice is if you need cash savings convert it to a commodity based currency like the Australian $ or the New Zealand Kiwi or the Canadian $ - I wrote a couple of posts called "The Ultimate Buy" a few months back, and one side effect of the commodity and agriculture shortages we will be facing in a few years is the currencies that have a high percentage of their economies dedicated to these things will be worth a lot more than high-debt currencies like the USD or the Pound.

Anyway, happy investing and trading all! There are still a lot of cheap companies out there, you just generally have to look overseas (Asia, Brazil, Canada, Australia, Singapore, Hong Kong, some India, etc) to find them. Best of fortune to everyone!