Monday, May 31, 2010

Latest Roubini: Double Dip, Banks Are Back To Old Ways, Brazil Could Grow 7%

Noriel Roubini gave an interview to the great O Estado de Sao Paulo (in Portuguese) newspaper in Brazil. Here are his main points.

Nouriel Roubini is launching a book about the turbulent global capitalism's period: The Economics of Crisis, with the historian Stephen Mihm and asserts that developing countries wil have different expansion rates in the coming years.

He says that Brazil needs structural changes to grow by over 5% per annum. "With reforms, Brazil could grow 7% for a decade."Roubini reaffirms the dangers posed by the debt of European countries again warning that Greece is only the tip of the iceberg and about the difficulties of governments to make needed reforms to prevent a repate of the 2008 and 2009 crisis.

Please note that the latest estimates for GDP growth in Brazil were published today: 6.47%, increasing for the 11th consecutive time.

In your book, you speak of a continuing recovery for the economy. Is "Dr. Doom" more optimistic?

I try to be realistic. The optimistic view is that the recovery will be in "U" shape. But I am concerned about the situation in Europe. The current forecast for euro zone growth this year is 0.8% and can get close to zero. With this, we can say that there is a risk of a double crisis in Europe. There will be more anemic recovery in the U.S., Europe and Japan, and a stronger expansion in developing countries.

Are we shifting from a banking crisis to a debt crisis?

The global crisis started with a lot of leverage in the private sector. The problem was for the public sector, with budget deficits of 10% of GDP and public debt above 100% of GDP in advanced economies. This happened because of the expense of governments to prevent the recession from becoming a depression. The problems in Greece are the tip of the iceberg. Already spread through Spain and Portugal and can affect Japan, UK and U.S.

Did the role of government in the economy change after the crisis?

The crisis showed that a market economy is the best solution, but that regulation is also required. The role of government intervention has been recognized, but they must not get involved too much, only with a supervisory role. To believe in private regulation is the same as believing that the system does not need any regulation. During the crisis, banks have become more risk averse, but are now back to the old ways, they have not learned the lesson.

But is there political power to make the necessary reforms?

We need to accelerate structural reforms in Europe and change the regulation of the financial system. The question is whether governments will be able to do that. Until now, there was more more talk about the need of what to do than real action. In the opposite scenario, in Brazil there is talk of excessive growth.


Brazil is growing at more than 7%, but this will not hold because it is beyond the capability of the country. It is also timely: commodities are booming and there is inflow of capital. With reforms, Brazil could grow 7% for a decade. We need to increase productivity, with economic reforms, investment in human and physical capital and innovation. Without it, Brazil does not grow 7% (annually). Today, the potential is between 4% and 5%.

An article defending the dictatorship in Brazil was published in RGE (Roubini Global Economics). How did it happen?

We are open to different viewpoints, but we will not publish anything extreme. This particular text preached something wrong and we apologized for having it published. So then it was taken down.

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Brazil Becomes a Model for Argentina.

Brazil's O Estado de Sao Paulo has an interesting piece on the situation of Argentina in Latin-America. One hundred years ago Argentina strove to imitate Europe. Businessmen, politicians and opinion leaders argued that the style of government administration and business to follow was then the European one.

Argentina then wanted to join the Commmonweatth. In the 1930's Foreign Minister Julio Roca sparked controversy when he said that Argentina was "one of the British crown jewels." This idea of being linked to Europe by a kind of commercial and cultural umbilical cord persisted over nine decades and interspersed with admiration for the United States.

Brazil, during the 20th century, was initially regarded with contempt and then as an economic and political rival. But the crisis of 2001-2002 changed the Argentine models. The country stopped looking to the Old Continent and America as examples. Brazil is no longer seen as a rival and began to be evaluated as a regional leader and a new model. Many Argentines indicate that there is already a dependence relationship with Brazil.

One of the first to bring the image to the public was the businessman Franco Macri - a symbol of local capitalism in the '90s - that in 1995, said: "Soon, Argentina will become the State number 27 in Brazil." A month ago, Macri repeated the concept, but as fact: "Argentina is one province of Brazil."

In recent months, the growing weight of Brazil in the world, along with the expansion of Brazilian companies in Argentina, has caused that the model to follow now is the Brazilian. Newspapers, magazines and TV programs in Buenos Aires devote large space to the "success" of Brazil.

In 1910, GDP was twice that of Argentina in Brazil. But in 2010 the Argentine GDP is one fifth of the Brazilian.

The Argentine woes have widened since 1975, when it began a series of six heavy economic crises, accompanied by political turmoil that led to the passage of 16 presidents (Brazil has had seven presidents in that period). In addition to leakage of foreign exchange, Argentina suffered an exodus of professionals that has undermined the country's technical capacity.

However, despite the crisis, the country can maintain a high HDI (human development index, which measures the quality of life). The index is compiled by the United Nations Development Programme and shows that Argentina ranks number 49 among 180 countries, the second in Latin America, behind Chile (in world rankings, Brazil is at 75th) .

But, when the index began to be developed 20 years ago, Argentina was 38th.

Former deputy economy minister Orlando Ferreres said that unlike Brazil, Argentina "lacked long-term strategies." According to the economist, therefore the country is experiencing a scenario in which even the meat - the national symbol - has a growing presence in Brazil, "Argentine refrigerators are bought by Brazilian companies, with support from BNDES, an organization which we envy, without similar in Argentina"

President Cristina Kirchner also claimed last week to have "better relationships with Brazilian businessmen investing in Argentina than with the actual industrial Argentines." In the speech launching the campaign in 2007, Cristina Kirchner cited a single company - Embraer - as a model to be imitated.

Brazilian products.

Products "made in Brazil" are already part of everyday life in Argentina, and resist any attempt to boycott. Throughout the decade, on several occasions, unions and business associations have tried to unleash campaigns against Brazilian products. All failed.

A citizen of Buenos Aires can wake up in the morning, wash his or her face and dry it with a Coteminas towel, produced in the province of Santiago del Estero. Then you can wear jeans (70% of Argentine denim is in the hands of Brazilian companies) and put one foot in footwear produced by the Brazilian industry in Chivilcoy Paqueta. Further, when leaving home in a car, he or she would fuel up at a Petrobras gas station. Lunchtime would be in a restaurant built with cement from Loma Negra (bought by Camargo Correa), enjoying a steak from one of many Brazilian slaughterhouses - including Friboi and Marfrig - which in recent years acquired companies in Argentina.

At checkout, they can pay with a debit card from bank Itaú (ITUB in NewYork).

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Sunday, May 30, 2010

Now France Faces Challenges to Keep AAA Rating

While much atention has being drawn to the PIIGS countries, there are even bigger countries at risk. The FT reports that France admitted today that it faces a challenge in maintaining its AAA credit rating. France, in particular, has been heavy criticized for announcing a debt reduction plan that relies too heavily on optimistic growth forecasts.

France's budget minister, François Baroin, said the government "was committed to maintaining the rating that has helped to keep down the heavily indebted state’s borrowing costs. But the objective is challenging and it will in part condition the savings strategies that we want to have”,

Government spending will be frozen at 2009 levels, and €5B in "tax niches" will be cut. However, France still must increase savings by another €100B if it wants to meet a target of bringing the public deficit from 8% in 2010 to 3% by 2013.

Spain was downgraded this week. Downgrades increase the challenges by raising borrowing costs - that already drain budget finances.

Says the FT: "In a note published in March, Moody’s, the rating agency, said that France’s triple A rating was “not in danger”. Under most plausible scenarios, France could continue to pay its debt. However, the agency added: “The ongoing deterioration in public finances does result in an inexorable erosion of . . . the distance to downgrade.” It suggested the government’s deficit plans remained hostage to its growth forecasts".

Sarkozy has embarked on controversial reform of the country’s pension system, which accounts for close to 70 per cent of social spending, the biggest contributor to the budget deficit.

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Friday, May 28, 2010

Spain Loses AAA Rating, Stocks Plunge

At 12:35 PM today Spain lost its AAA rating:

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Oil Leak: Profit From BP Going Up or Down

BP (click to receive buy and sell allerts) is down 4% today, after rising 5% yesterday. The stock is extremely volatile due to the very serious issues with the oil leak. There are reports of cover-ups, of 2nd oil leaks, live (real or fake?) video feeds, etc. What a circus, but one that is not funny at all.

This is another great situation for our favorite straddles.

Here are straddles for June:

Computed with StraddlesCalc Tool.

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

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ToysRUs To Raise $800M in IPO to Pay Debt, GS, BAC, C To Get Richer

ToysRUs today announced plans to raise $800M in an IPO, part of the proceeds to reduce debt. The company is the largest U.S. toy store chain. The report is from Bloomberg.

Who will get richer? Besides the debt holders, the usual money making machines will pocket lots and lots of millions: Goldman Sachs Group Inc., JPMorgan Chase & Co., Bank of America Corp., Credit Suisse Group AG, Deutsche Bank AG, Citigroup Inc. and Wells Fargo & Co., who are managing the sale.

"Toys “R” Us is forging ahead with its sale even after the European debt crisis pushed the Standard & Poor’s 500 Index down 7.1 percent this month and prompted at least 20 companies around the world to postpone or withdraw IPOs. Initial offerings from U.S. companies backed by private-equity firms are also losing money for investors for the first time in a least a decade.

Bain of Boston, KKR and Vornado Realty Trust in New York bought Toys “R” Us for $7.5 billion, including assumed debt".

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The BP Disaster: Another Bigger Oil Leak 5 Miles Away

Dylan Ratigan, Matt Simmons on MSNBC: What you see on TV is not the real thing; there is a likely another leak.

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Live Feed Of BP's Oil leak; BP May Not Survive

BP has a live video feed at site of the oil leak:

While that stuff goes up, their stock goes down:

Rumours are that the company will not survive as a single entity. You can just imagine the lawsuits that are coming.

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Sprott: Governments Have Run Out of Ammunition, Stocks to Collapse

Eric Sprott says that the recent stock plunge is just the beginning. The upcoming collapse will drive the stock indices below their lows of 2009 in 2011.

According to him, the '$1 trillion' (although it seems only the IMF money is real) European rescue package shows investors are skeptical that these efforts to fix the debt crisis will work.

As usual, Sprott is buying gold (and betting against stocks). Everyone talks their own book, but that is what he is saying.

Governments Have Run Out of Ammunition

Accordign to the story in Business Week, Sprott bets that governments around the world have run out of ammunition in their attempt to boost economic growth and counter banking losses through stimulus spending and lower interest rates

“Our thesis is we’re in for a long, deep cycle, and we’ve thought that since 2000, but up to this point, governments and central banks have always tried to stave it off,”

Since budget deficits are surpassing 10% of GDP in Ireland, Greece, the U.K. and Spain, with the U.S. very close 9.3%, "policy makers have no choice but to pare spending, threatening economic growth".

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Wednesday, May 26, 2010

More Roubini: Euro To Weaken Further, Serious Difficulties, Some Countries Will Be Forced To Abandon Currency

Nouriel Roubini is making the news round again. This time, the professor was at a conference in Bucharest saying that markets are not convinced that Greece will control its budget deficit and that has "undermined confidence in the euro" (Bloomberg). Talk about an understatement!

He adds that there are also concerns Spain and Portugal, countries which "lack the political will to cut spending". Note that italy today announced budegt "cuts" in the form of contained salary raises.

“The markets are not credibly convinced Greece can do the fiscal adjustment it engaged to do,” . There are “also questions whether, from a political point of view, there’s going to be support for budget consolidation in these countries -- Greece, Portugal and Spain.”

Euro To Weaken Further

Roubini also adds that the euro will weaken further, and some countries may be forced to abandon the common currency,

“I’m not predicting the breakup of euro zone, but the probability is not zero that some of weakest members of euro zone might decide to exit it,”

There are “serious economic difficulties in the euro zone,” “There’s even a risk of a double-dip recession"

"The recovery will be more robust in emerging markets than in developed countries"

“I’m concerned about the economic prospects of Japan and optimistic about the U.S., but even there the economic growth is going to be below trend,” “I’m more concerned about prospects of the euro zone.”

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Marc Faber: Still Very Bearish But Are Oversold In the Short Term; S&P500 Lots of Support at 1040

Marc Faber was on Bloomberg TV. He says stocks are quite oversold in the near term, but not in the long term. There is lots of support on the S&p500 around 1040/1050.
June and July are usually better months, but then we will go down and bottom out in October/November.
He says GDP has not increased.

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Forget The Rating Agencies: Banks, GS and BNP Paribas Downgraded Nearly 5 Notches Lower By Investors

Bloomberg reports today that bond investors are no longer waiting for ratings companies to act before downgrading Goldman Sachs Group Inc. BNP Paribas, "and the rest of the world’s biggest financial institutions". And the downgrades are near 5 grades lower.

It turns out that bank debt is now yielding 253 basis points more than government securities, with data from Bank of America Merrill Lynch’s Global Broad Market Financial Index.

Given that industrial company notes yield 268 basis point ans those are five grades lower, investors have spoken about what the think about banks and rating companies.

The gap between the two benchmarks was down from 177 basis points at the start of 2009 to about 11 points this month.

"Investors are marking down bank bonds on concern Europe’s sovereign debt crisis will reduce lenders’ creditworthiness and that regulatory efforts to control risk taking will crimp their profits. Banks may have a capital deficit of more than $1.5 trillion by the end of 2011 and some may require state support, according to Independent Credit View, a Swiss rating company".

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Tuesday, May 25, 2010

Banks Need To Raise Another $1.5T

Rumours are circulating that Tim Geithner wants European bank stress tests. We know how ridiculous those were in the US... Anyway, Independent Credit View, a Swiss rating company, says that banks may have a capital deficit of more than $1.5T by the end of next year, with some of them requiring state support.

The worst offenders are AIB, Commerzbank AG, Bank of Ireland Plc, and RBS.

“Without state aid or debt restructuring these banks will hardly be able to raise capital,”, says the report. They also forecast “massive dilution for existing shareholders.”

According to Bloomberg, the report compared estimated capital needs for the end of 2011 with capital ratios reported at the end of 2009, taking into account the banks’ earnings estimates for 2010 and 2011, forecasts for loan and provisions growth as well as an increase in the tangible common equity ratio to 10%.

AIB may need to raise capital equal to 681% percent of their current market value. Bank of Ireland fares better, may need to raise capital equal to 536% of their current market values!

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Federal Housing Administration: Mortgage Market Is Very Sick

David Stevens, head of the Federal Housing Administration said yesterday that the mortgage market is purely on life support, and is sustained by the federal government,”.

According to Bloomberg, loans guaranteed by the FHA (the U.S.-owned mortgage insurer), may be involved in more home-purchase transactions than borrowing financed by Freddie and Fannie. FHA lending last quarter may have topped the combined volume of both of them in a home-lending market that’s still a “government-financed market.”

Stevens adds that “Having FHA do this much volume is a sign of a very sick system.”

"The FHA, which backs loans with down payments as low as 3.5 percent, insured $52.5 billion of home-purchase mortgages in the first quarter, compared with $46 billion of purchases of the debt by Fannie Mae and Freddie Mac, according to data compiled by Washington-based Potomac Partners".

The FHA, Freddie and Fannie have been financing more than 90% of U.S. home lending.

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Monday, May 24, 2010

Interview With Sam Antar: No Redemption; How Criminals Con You

Next time someone compliments you and throws some charm your way, you may want to think about this.

Ilene carrie, editor of Phil's Stock World (the options guru with a great daily trading chat session), interviewed Sam Antar, of the Crazy Eddie fraud story. Concise and to the point, the interview was quite revealing and amusing specially for those of us who have always declared every penny of income to the tax authotities.

Introduction to No Redemption by Sam Antar

The most difficult crimes to deter, investigate, and prosecute are committed by organized crime groups who share the same race, religion, ethnic, and cultural backgrounds. The social cohesiveness of such criminal groups makes it relatively easy for them to coordinate their actions to effectively execute and cover up their crimes over long periods of time.

When most people think of organized crime, they think of violent criminal groups such as the Mafia. However, not all organized crime groups use violence in the execution of their crimes.

Some of the most effective organized crime groups consist of white-collar criminals who do not use any violence at all. Such organized white-collar criminal groups can be found among primarily family based businesses, even after such businesses become public companies because their management is dominated by well coordinated and cohesive family members.

Members of the Antar family, myself included, who committed the Crazy Eddie fraud, used a combination of deceit, charm, and distraction to effectively commit our crimes over an 18 year period. While we didn’t kill people, we were was just as brutal and caused just as much harm as if we were violent criminals. You can steal more with a smile than you can steal with gun.

I was recently interviewed by Ilene Carrie (syndicated blogger, editor at Phil's Stock World, and attorney) about the Crazy Eddie fraud and the mind, motivations, and techniques of white-collar criminals. [Sam Antar, The Brutality of Non-violent Organized White-Collar Crime Groups]

No Redemption

Interview with Sam Antar, by Ilene, part 1.

Sam Antar will tell you all about his crimes, in every last detail, while insisting he is and always will be a criminal, and will burn in Hell for the massive amounts of harm and destruction to lives he has caused.

My initial reaction was not to believe Sam, being sure, having never spoken with him before, and not knowing much about Crazy Eddie, that Sam was mistaken about burning in Hell. After all, he is now teaching others about white collar crime and the criminal perpetrators of the crimes. Guilt is such a deadly emotion, and you don’t even have to be aware of it suffer its assaults on your psyche. He’s probably plagued with guilt, I surmised. Which would mean he’s not a sociopath. Of course, I am not a sociopath and have no insight into the sociopathic mind. But I felt eager to learn. Besides, Sam warned me not to believe a word he said.

Before our interview began, Sam shared the basic tactics that white collar criminals use to exploit and scam their victims:

1. White collar criminals consider your humanity, ethics, and good intentions as a weakness to be exploited in the execution of their crimes.
2. White collar criminals measure their effectiveness by the comfort level of their victims.
3. White collar criminals build a wall of false integrity around them to gain the trust of their victims.

At this point, I was feeling comfortable with Sam, admiring his self-insight and commitment to telling the truth. So when Sam said that by the time he was finished with me, I’d be a paranoid schizophrenic and never trust another man again, I was again thinking he was wrong. Just like the ideal victim type I am.

Ilene: Sam, you wrote on your website “I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other family members mastermind one of the largest securities frauds uncovered during the 1980s. My responsibilities at Crazy Eddie included skimming, money laundering, insurance fraud, securities fraud, and a list of other criminal activities too long to list here.” Could you elaborate on what you were doing?

Sam: Committing white collar crimes, for money. We enjoyed begin criminals, and enjoyed the money. We had no empathy for the people we hurt. We didn’t even need the money, just wanted more.

It started when the company, Crazy Eddie, was a private company in 1969. As a private company, there’s no need to boost income – you want to keep reported income low because you have to pay taxes on it. So we skimmed money off the top. If someone paid cash for an item, which was more common back then than it is now, we wouldn’t report it to the IRS. By not declaring the income, we could avoid the sales tax and the income tax — we’d be way ahead.
As a public company, however, we had to do the opposite. We wanted earnings so it would appear as though the company was growing quickly. We wanted fictitious earnings.
Ilene: How do you create fictitious earnings?

Sam: Double counting inventory, overstating inventory, understating accounts payable, money laundering, and other methods.

Ilene: Did your auditors miss your accounting inaccuracies?

Sam: Public accountants that are sent out to audit public companies are typically young kids who do most of the leg work. In those days, they were mostly guys in their twenties, say 22 years old to 26 years old, perhaps even 30 years old. But basically younger guys.
I was a pimp and matchmaker for them and would set them up with young girls to distract them and keep them busy. You know, these guys think with their penises, not their heads.
You never tell an auditor they can’t have something. You just agree and don’t follow through. It wasn’t hard to distract them from their audits by pairing them with girls — these guys are like Pavlov’s dogs – throw women in front of these guys and they are very distractible.

Ilene: Did the girls know what you were up to?

Sam: Some did, some didn’t. You can steal more with a smile than with a gun.
Criminals are like females, we use charm and deceit to get what we want. White collar crime is all about confidence. White collar criminals are con men, they need to gain the confidence of their victim. They do this by smiling and flattering the victims. Here’s a politically incorrect example. How many guys have told you how great you are in order to get favors from you?

Ilene: I don’t know the number but you mean like romancing the victim?

Sam: Yes. Criminals use the same technique you see when a guy’s trying to pick up a girl. That’s how while collar criminals gain confidence – they’ll use flattery and tell many lies.
I started working from Crazy Eddie when I was 14 years old. I was essentially trained, from day one, to be an effective criminal within the family business.

Ilene: Do you think your criminal nature is genetic or environmental, or a combination?

Sam: I don’t know about the genetics, but there’s certainly environmental factors involved. My family is Sephardic Jews. My grandparents came to the United States in the early 1920s. They had been highly discriminated against in the past, in Syria, where my family is from.
We had to be insular to cope with the discrimination, and that helped build a culture of cohesion within our family. The same cohesiveness helped the community, the culture, survive living in Arab lands.
Likewise, organized crime groups commonly share the same social, ethnic and religious groupings. The members are bound together by religion and stature within the criminal group.

Ilene: Like the Mafia?

Sam: Yes.

Ilene: But you didn’t kill people.

Sam: No, I didn’t kill people but I was just as brutal and caused just as much harm as if I did.
This was the life that I was brought up to be in, within an otherwise law-abiding community. However, in every tight-knit community there exists a criminal subculture that benefits from the cohesiveness of that community. The same cohesiveness that helped the community survive also helped the small criminal subculture within that community to be more effective and survive, too.
Social cohesion is like higher education, there are good sides of it, but education can be used for bad things, too. College helped me supplement my criminal ways so that I could become a better white collar criminal, with my acquired accounting skills.

Ilene: So your crimes grew progressively worse?

Sam: Yes. Most mom and pop retailers skim money off the top – we were a family of merchants, and skimming was normal at the time. My cousin Eddie started the company, and in this new business, not declaring income to the IRS, was normal.
Criminals are no different from regular people in that criminal behavior starts small. To understand criminal behavior, you have to take the morality out of the equation. Most people don’t prepare for failure. Like people don’t plan to go bankrupt, criminals also don’t prepare to get caught.

Skimming profits and cheating the IRS was a first step. Next was insurance fraud. So, for example, if someone stole a truck full of merchandise, we could report more merchandise stolen than was actually stolen to the insurance company. Who is going to believe the thief if he gets caught? Or if there was a flood that damaged some inventory, we could throw all the non-salable goods onto the damage list to increase our insurance proceeds.

Crazy Eddie functioned as a private company from 1969 to 1984. In 1980, we started preparing to go public. Our goal of minimizing profits switched to that of increasing profits and legitimatizing the company, "going legit." In effect, we committed securities fraud through the process of going legit by gradually reducing our skimming and increasing our reported profits.
Now, we wanted to show growth in earnings. Gradually and fraudulently, we reduced the amount of skimming to zero to inflate our growth rate. When we went public in 1984, our growth rate appeared much greater than it really was. By misrepresenting our growth in profits, we were committing securities fraud in addition to our other sins. We were portraying ourselves as a legitimate public company, until finally it all became unsustainable.

End of Part 1.


Sam Antar describes himself as:

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals.

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Currencies Are In Chaos Today: Huge Volatility Is Here

This is a chart of the Euro today, since midnight:

(please click to enlarge)

At midnight The Euro was trading at 1.2523; at 7AM it traded at 1.2357. That is a move of 1.33% in 7 hours. These moves have a corresponding effect on the stock prices and commodities, so volatility is to be expected again, which is great for our straddles.

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Sunday, May 23, 2010

The Top 30 ETFs To Buy and To Sell

Stocks have taken a tumble since we last published the list of most overvalued and most oversold ETFs. This list has changed considerably now as the ETFs that were overbought had steep drops.

We computed the relative strength values of al ETFs that trade in the US. We then sorted them by RSIA, the average for short, medium and long terms.

Top 30 most oversold ETFs:

(please elick to enlarge)

Most oversold are two very well known ETFs: TBT and PST, which are ultra short bond ETFs (please click on links to receive buy/sell alerts). This is a first that I have seen on this list. This means that bonds are in deeply overbought territory (hence the shorts are oversold).

Next are FXF (Swiss Franc) , ICLN (clean energy, interestingly, with the BP oil spill and all), and BBH (Biotech).

Note also that USO is the worst for the short term, with a daily RSI of 13.

Top 30 most overbought ETFs:

The worst offenders, as in very overvalued (or that have done very well) are DUG (short oil producers) and EEZ (Wizdomtree Top100) , BIV (intermediate term bonds) and BND (bonds) close behind.

Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

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Saturday, May 22, 2010

It Is Coming: One Euro = One Dollar

There is potential for a bounce to the 1.26 level, but it does not change the trend.

1 Euro = 1 USD. Watch video

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Thursday, May 20, 2010

Greatest Month Ever For Oil Straddles: +403.72%

OpEx is tomorrow. May was a very good month for oil, particularly our favorite oil ETF: UCO. This ETF is just fabulous for straddles. Prices as of 1PM today show an ROI of over +400%:

Computed with StraddlesCalc Tool

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Europe is Disjointed: With Friends Like Merkel, Who Needs Enemies?

The Telegraph has a great piece on how Angela Merkel has lost her touch.

The article defends that the threat to financial stability is not the markets but the political decisions that markets are reacting to ("most notably Greece's decision to run a Ponzi scheme instead of a country").

"Merkel's unilateral ban on the short selling of European government debt, [...] is an example of the disjointed and fragmented political behaviour that the euro zone suffers from so much".

Confidence is draining away from the single currency, "a symbol of monetary union that has never enjoyed the requisite political union to make it work".

Merkel's coalition has lost control of the federal upper house, then she announced the ban against short sellers, which sunk the markets and appear to have no other takers. Increasingly the chancellor is alone.

"Merkel can cover her ears and talk loudly about threats to the euro, but that won't make Europe's debt crisis go away. The speculative attacks, if that is what they are, will continue until the investors that European governments rely on are convinced that the euro system is robust and disciplined. That won't happen until it is clear that members such as Greece are going to reform and restructure their economies so they can live within their means. That requires austerity measures which could still prove politically unacceptable and if the political will is weak then so too is the currency".

The article asks the ruight questions, in what state are European's banks really in? The bailout was for them, another case of transferring money from taxpayers to banks.

"But at the heart of Europe's existential crisis are its banks".

"As with Merkel's decision on short selling, far from reassuring investors this kind of action simply saps confidence further as markets wonder what the real motivation is behind such short term and damaging political expediency".

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Wednesday, May 19, 2010

Gold Bubble: Gold Buyback Program Coming to Kmart and Sears

This could be the sign that the gold bubble is about to burst. Sears has announced a gold buyback program.

"Sears Holdings is proud to announce the introduction of a consumer gold buyback program, powered by Pro Gold Network, available at all Sears and Kmart Fine Jewelry Counters.

Consumers looking to sell their gold or silver items can now do so by utilizing convenient ProKits, available in the Jewelry Department at their local Sears or Kmart store.

"We are happy to partner with The Pro Gold Network to provide a great service to our customers who have been asking for a secure way to exchange their gold jewelry for cash," said Michelle Pearlman, Senior Vice President and President of Jewelry at Sears Holdings. "

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Richard Russell: Get Out of the Markets, Now

From the latest Richard Russel newsletter:

Do your friends a favor. Tell them to “batten down the hatches” because
there’s a HARD RAIN coming. Tell them to get out of debt and sell anything they
can sell (and don’t need) in order to get liquid. Tell them that Richard Russell
says that by the end of this year they won’t recognize the country. They’ll
retort, “How the dickens does Russell know — who told him?” Tell them the stock market told him.”
He comments on all the bullish news being put out by financial media, and disagrees.

"The fact is that I’ve been seeing deterioration in the stock market ever since early-April, and this in the face of improving business news. The D-J Industrial Average is composed of 30 internationally known top-quality blue-chip stocks. These are 30 of “America’s biggest companies.” If Barron’s is so bullish on the future of America’s biggest companies, then why isn’t the Dow advancing to new highs?"

"Clearly something is wrong. But what could it be? Much as I love Barron’s, but I trust the stock market more. If I read the stock market correctly, it’s telling me that there is a surprise ahead. And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead".

About Russel: A native New Yorker (born in 1924) Russell has lived through depressions and booms, through good times and bad, through war and peace. He was educated at Rutgers and received his BA at NYU. Russell flew as a combat bombardier on B-25 Mitchell Bombers with the 12th Air Force during World War II.

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Park: Deflation is Back in Play; Government Money Did Not Work; Long TLT and USD

The great Danielle Park was interviewed by BNN today. As always, she was great and right on. Some of her points:
  • German ban on naked short selling is a desperate stroke; government intervention on the markets does not work
  • It's being done because politicians wnat to be popular (defending the Euro)
  • Debt is the real problem
  • She is long USD, TLT

  • Risk assets are being sold

  • Shanghai is the canary in the global cola mine; it peaked in August

  • TLT is saying the deflation is back in play. All the money governments threw at the economy did not work

  • 40 states have aannounced job cuts (to balance budgets)

  • Moving away from oil, gold, China, Canada
Ms. Park is the author of the great book "Juggling Dynamite", reviewed and recommended here on April 7.

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Goldman Sachs Perfect Trading Record is Perfect For Itself Only as 7 Out of 9 Recommended Trades Lose Money for Clients

Goldman Sachs may have had a perfect trading record in Q1, with gains every single trading day, a 100% success feat that is considered nearly impossible in normal markets (as in non rigged markets). The firm has also been acussed of "betting against clients".

The accusations are gaining momentum today after Bloomberg reports that its clients who followed the firm’s investment advice have fared muchworse.

Out of its nine “recommended top trades for 2010”, 7 have lost money for their investors. That's a success ratio of 22.3%.

Says the report:

  • Clients who used the tips lost 14% buying the Polish zloty versus the Japanese yen,
  • 9.4% buying Chinese stocks in Hong Kong and
  • 9.8% trading the British pound against the New Zealand dollar.
According to Gary Cohn, Goldman Sachs’s trading profits come from capturing bid-offer spreads when its traders act as intermediaries for clients, and "proprietary trading is not a main driver of earnings".

In April Goldman Sachs also added a ninth top trade, "telling clients to buy Chinese stocks listed in Hong Kong and predicting the hang Seng index would rise 19% to 15,000". The index is at 11,426.18, or about -9%.

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Euro Stabilizes Overnight

European stock markers are deeply negative today. Interestingly, the Euro has stabilized since yesterday 3PM:

(please click to enlarge)
Will the Euro bounce or continue to drop? That is why we use straddles.

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Tuesday, May 18, 2010

Germany Makes Mistake of Severe Consequences by Banning Short Selling

Germany's decision today to ban naked short selling and naked credit-default swaps of euro-area government bonds looks like panic. The issue is that market does not know what is coming. The decision does make it look like something is going on. We also know that such measures do not work, as similar measures were taken in the US before of the last crash.

Confirming this, according to Bloomberg, Marc Grant, managing director of Southwest Securities Inc. said “This is a mistake of a serious fundamental nature and of severe consequence,”, in a note to institutional clients. Germany is making “an obvious attempt to control financial markets across the globe by this action just as they plead for investors to provide funding,”.

Michael Malpede, analyst at Easy Forex in Chicago: "It tends to suggest desperation on the part of the German officials who want to discourage what they consider speculative attacks on euro zone financial markets."

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Oil Continues To Drop, At Perfect Price for June UCO Straddles

Amazingly, Oil dropped eve more today. Our favorite ETF, UCO, is at a perfect price exactly in the middle between strike prices. Here are the perfect straddles for June (not May!):

May expiration is too close and you do not want to buy in between strikes. Computed with StraddlesCalc Tool, which shows the maximum move required for the position to achieve profitability. Because there are still many days till June expiration, the actual move needed can be significantly lower, as happened repeatedly in May
Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

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Ex-Bundesbank Chief: Greece Will Never Repay Debt, Bailout Deal Real Reason Was to Protect French and German Banks

Germany's Der Spiegel published a shocking interview with Karl-Otto Poehl, Bundesbank chief between 1980 and 1991 (“Mr. D-Mark,”).

Karl Otto Pöhl said that Greece may ultimately have to opt out, and that the foundation of the euro has been fundamentally weakened: "There is still danger that the euro will become a weak currency. "

Violation of Rules

Mr. Pöhl added that the bond purchases are "a violation of every rule". His message was so string, that governments in Germany had to issue a public response on the weekend, saying that "The ECB is allowed to buy government bonds in secondary markets, and will prevent inflation effects by offsetting those purchases with sales of other assets".

Selling Assets

What other assets can possibly be worth 350B Euros? There is no details of this. Selling assets worth 350B Euros will of course cause major havoc too. Or is it gold they will be 'selling'?

According to him, there are “a whole list of weak currencies that never should have been allowed into the euro,”. The treaties governing the functioning of the EU explicitly states that no country is liable for the debts of any other.

Admitting Greece was a Mistake

He is adamant that admitting Greece in the EU was a mistake. Europe should have "realized that a small, indeed a tiny, country like Greece, one with no industrial base, would never be in a position to pay back €300 billion worth of debt". Without a haircut, a partial debt waiver, it cannot and will not ever happen. So why not immediately? That would have been one alternative. The European Union should have declared half a year ago -- or even earlier -- that Greek debt needed restructuring".

The Deal Was About Protecting the Banks

He says was the deal was about protecting German banks and especially the French banks from debt write offs.

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Roubini: Second Stage of Financial Crisis is Here; U.K. Coalition to be Tested

More bleak news today. After Meredith Whitney, today it was Roubini's turn. In an interview with BBC he says that “What we’re facing right now in the eurozone is a second stage of a typical financial crisis.”

He adds that "questions remain about whether governments are strong enough to implement the austerity measures required",

There is “significant economic and financial trouble in the eurozone,” “Today” program. The recent riots in Greece in response to fiscal cuts have fueled doubts about some European governments’ ability to solve these problems".

“There’s a question mark whether we can be confident the government is going to be strong enough to do the fiscal austerity,” “If these packages of austerity are going to be implemented markets are going to stabilize.”

On the U.K.’s new Conservative-Liberal Democrat coalition government: “We’ll see when things are going to have to happen, when the tough decision is going to have to be made on revenues, on spending, whether that coalition is going to remain strong or not,”.

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Latest Meredith Whitney Predictions: Rest of 2010 WiIl Be Very Bleak for Stocks

Meredith Whitney was on CNBC yesterday. She says she is very concerned with the bank regulations being pushed forward and that it will ultimately punish small businesses by curbing lending even more, in her words: "just at the time when you need more liquidity".

"I think you will see at least another $1.3 trillion sucked out of the system".

On jobs and unemployment: "There is no way to resolve this. ... We are going to have a really dangerous, chronically high unemployment situation on our hands for a very long time".

Asked if she would invest in Europe (banks): "Not in a million years. The European banks are still underfunded, still carry assets that are worse marked than even the US banks. You have hundreds of billions of dollars of recaps that need to take place in Europe".

For the stock markets for the rest of 2010: "I think it's going to be bleak. I think that you have really no end demand from the consumer. I think you are going to see the double dip in housing take place in the second half and it's going to be rocky sledding".


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Monday, May 17, 2010

Are we Having Inflation or Deflation, or Both? Proper Investments for Each Scenario

Will inflation or deflation will shape the global economy going forward? Gary Shilling, president of A. Gary Shilling and Company, and Jeffrey Saut, chief investment strategist, Raymond James squared off on the subject on BNN today.

Shilling says we will have deflation as there is an an excess of supply and not enough demand. Saut says we will have inflation as governments have made cash abundant.
Both suggest proper investments for each scenario.

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China Buys U.S. Treasuries For the First Time in 6 Months: $17.7B

China has again bought Treasury securities in the United States in March, the first time in six months, expanding its position as the largest holder of such papers from the U.S. Treasury. In March, China purchased U.S. $ 17.7 billion in Treasuries, followed by sales of $ 11.5 billion in February, according to the monthly report from the U.S. Treasury, the Treasury International Capital report, known as ICT, in English acronym.Sales of securities by China at the end of last year caused initial concerns that the largest creditor nation of the United States was abandoning the U.S. assets

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Oil and Euro Continue to Sink, Straddles ROI Is +280%+

Oil and the Euro continue to sink. Our straddles continue to perform stellarly. Below are past posted straddles as of around 12:45PM today.

UCO, best is +283% (3.8X):

FXE (best is +285%, 3.85X)

There are several more posted which are quite profitable too. Computed with StraddlesCalc Tool

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Saturday, May 15, 2010

Eichengreen: Bailout Package Came Too Late: Europe To Go Into Recession

Barry Eichengreen, economist and professor of Economics and Political Science at the University California, Berkeley, Eichengreen is considered a leading expert on the history and functioning of international financial and monetary system.

He gave an interview to AP/Agencia Estado. he believes that although the European Union (EU) and the IMF have created a package of 750B to try to prevent a contagion of Greece's fiscal problems on other countries of the region and protect the euro, the European bloc has a very long road ahead. A road where a new plunge into recession appears inevitable.

He says: "Governments have not taken measures for fiscal consolidation and the EU did not adopt the bailout package until it was too late,"

"Now we reached a point where a slowing European economy is almost inevitable greater," "This story is not over. The package is still in progress. The European Parliament has to agree and to have access to money, countries will have to negotiate a program with the IMF, which they do not want to do. The important part was not the package, but the decision of the European Central Bank to buy bonds from Greece, Spain, Portugal and Ireland. This allowed the debt market to calm down and took the time to governments"

On Spain and Portugal and announcing fiscal measures: "There is still uncertainty about what the Parliaments of Spain and Portugal will do. There will still be an economic slowdown and recession in Europe in countries further south. But the volatility is over".

Will the Euro collapse? He adds that the euro was punished by the crisis, but is still better than any alternative.

On possible fragmentation of Europe: "Recent years have taught us that anything is possible. But I think that fragmentation is unlikely. A Greek default is more likely. Restructure debt is not the same as abandoning the euro and reintroducing the drachma (Greek currency). The problems of Greece will not be solved if the country leaving the euro zone. The country must restructure its debt.

When the ECB may start increasing interest rates?

Interest rates: "The interest rates will not rise anytime soon".

Recession: "It's too late to avoid a double recession. Governments have not taken measures necessary for fiscal consolidation, the EU did adopt his bailout package until it was too late and now we reached a point where a slowdown is almost inevitable.

How long then to Europe to recover? "Depends on reforms, but we're talking years".

Is the U.S. safe? "The indicators show that the recovery is accelerating, and Europe will not help in this process. The worst thing that could happen would be Europe and China slowing down at the same time. Let's hope China continues doing well".

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Gold Is Soaring: The Top ETFs To Buy or To Sell

As readers know, we track gold and precious metals ETFs live as one of our Live tracking sites. It shows live performance, both daily and since Jan 2009:


Gold has soared in recent days and wesk, leaving many ETFs deeply oversold or overbought. We also computed the relative strength indicators of all the ETFs for short, medium, and long terms. We then sorted them by our preferred indicators, RSIA (average of time frames). These are the current values:

Deeply oversold are: DZZ, DGZ, with also JJN oversold on the short term (click on each link to receive buy/sell alerts)

Deeply overbought are DBP, DGL, and several on the long term, such as UGL, IAU, and the wildly popular GLD.

ETF names and average trading volume:

Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

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Oil Crashes: Top Oil ETFs To Buy and To Sell

As readers know, we track oil ETFs live as one of our Live tracking sites. It shows live performance, both daily and since Jan 2009:


With oil dropping so much this week, we also computed the relative strength indicators of all the ETFs for short, medium, and long terms. We then sorted them by our preferred indicators, RSIA (average of time frames). These are the current values:

Deeply oversold are: HOU.TO, OIL, USO, UCO (click on each link to receive buy/sell alerts)

Deeply overbought is DUG, while HOD.TO is also deeply oversold in the short term.

ETF names:

Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

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Friday, May 14, 2010

Oil Crashing This Week, Profit From Oil Going Up or Down Next Week

Our favorite ETF for oil straddles is UCO. here are Straddles for next week, and for June. With only one week left to expiration, next week's offers the highest risk, and the highest potential rewards.

UCO is trading at $10.15, not quite perfect, but close.

Computed with StraddlesCalc Tool

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

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Financials Cratering and TLT Soaring, Straddles +243%

This is an update from April 15.

XLF: +43.76% (click on symbol link to receive alerts)
TLT: + 243.18%

These were computed with StraddlesCalc Tool

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93% of Canadians Have Never Missed a Mortgage Payment

While you may see many reports out there about Canadian housing bubbles, according to a report just released by the Canadian Association of Accredited Mortgage Professionals (CAAMP), the vast majority (93%) of mortgage holders have never missed a payment. Out of 7% who have, 4% (57%) did so during the past year.

Their findings:

• Concern about rising rates is offset by increasing home equity
• Many mortgages were renegotiated at lower rates; amortization periods are declining
• Many Canadians have used cost savings from low rates to pay more than required, providing flexibility to deal with mortgage rate increases
• Mortgage debt is a priority: the vast majority of Canadians have never missed a payment
• A high percentage of Canadians still believe it is a good time to buy a home

The report entitled Prudence Paying Off For Canadian Mortgage Borrowers and is available on the CAAMP site.

Other facts:

  • the average outstanding principal is $138,000
  • the average amount of equity represents 53% of the average value of homes ($297,000). Approximately 11% of mortgage borrowers withdrew equity from their home in the past year, totaling $20 billion, a 41%reduction compared to the $34 billion estimate of 2009.
  • 65% of mortgages last year were at a fixed rate, 29% variable or adjustable, 6% are combination mortgages.
  • Most terms are long: 70% are five years or longer, 9% have short terms of two years or less, and 21% have terms of three or four years.
  • Out of the 65% with fixed rates, 12% locked in from a variable rate during the past 12 months and another 10% had locked in more than a year
  • 16% voluntarily increased payments
  • 13% made lump-sump payments

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France Threatened to Quit Euro: Bailout or Else; Euro Collapsing

The Guardian today reports that Spain's Prime Minister Zapatero revealed that France threatened to pull out of the euro if other EU countries, especially Germany, did not agree to rescue Greece. The revelation occurred at a closed-doors meeting of leaders from his Spanish socialist party on Wednesday.

"The French president made his startling threat at a Brussels summit of EU leaders last Friday, at which the deal to bail out Greece was agreed"

According to the report, Sarkozy demanded "a compromise from everyone to support Greece ... or France would reconsider its position in the euro,"

"Sarkozy went as far as banging his fist on the table and threatening to leave the euro," "That obliged Angela Merkel to bend and reach an agreement."

"France, Italy and Spain formed a common front against German and Sarkozy threatened Merkel with a break in the traditional Franco-German axis."

Spain's El País quotes Sarkozy as having said, that "if at time like this, with all that is happening, Europe is not capable of a united response, then the euro makes no sense".

USD $1T later, the Euro is back well below pre-bailout levels:

Yesterday our straddles were up 306% already.

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Why Natural Gas Should be Shorted or Sold

This is the latest storage chart, comparing last year's numbers with this year's. Note that last year's numbers were already at record highs.

Current storage is 2.089Tcf, compared with 1.992Tcf last year. That's only 4.8% higher, however, last years numbers were extremely high already. The current amount in storage is higher than the 5 year average (1.764Tcf by a whopping 18.4%)

Disclaimer: On the bounce up, the author went short NT yesterday (again), through

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Why Stocks Are Tanking Today

As of 6AM.

All in the space of a few hours:

Wen Jiabao, Chinese Premier said last night: "The foundations for a worldwide recovery aren’t “solid” and the sovereign-debt crisis is 'deepening,' .

Joseph Ackerman, CEO of Deutsche Bank AG said Greece may not be able to repay its debt in full.

Paul Volcker, former Federal Reserve Chairman said he’s concerned the euro area may break up: “You have the great problem of a potential disintegration of the euro,” “The essential element of discipline in economic policy and in fiscal policy that was hoped for” “so far not been rewarded in some countries.”

Sony Corp., said it may suffer a “significant impact” if Europe’s deficit spreads.

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Thursday, May 13, 2010

The Euro is One Sick Currency: Multiple Sell Signals Triggered; Huge Profits on Straddles

The Euro is touching 1.24 USD. This is one really sick currency after the $1T bailout package. Take a look at the sell signals generated by the MarketClub tool (access tool trial).

Euro in USD:

(please click to enlarge images)


FXE longer term (1 year), way beyond Fibonacci retracement levels:


And here are the results of our FXE straddles. Straddles continue to hugely profitable.

Posted April 14, ROI +238.15% (that's 3.3X):


Posted April 21, ROI +165.05% (2.6X):

Computed with StraddlesCalc Tool

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BP and Transocean Fight: Serious About Recycling

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Spain and Europe Are Introducing 1930's-Like Depression Deflationary Measures

There's a lot more people saying that the budget cuts will shrink the tax base (government's revenue), thus it will worsen deficit to GDP ratios. Spain's government announced deep budget cuts this week, with the aim of reducing deficit to 6% of GDP this fiscal year. Among other cuts and measures:

  • Public sector pay will be reduced by 5% this year and frozen in 2011.
  • Pension rises will be shelved.
  • The country’s €2,500 baby bonus will be cancelled.
  • Aid to the regions will be slashed
  • Infrastructure projects will be put on ice.

EMU's Internal Devaluation

The Telegraph says that Wage cuts amount to an "internal devaluation" within EMU. Stephen Lewis, from Monument Securities, says the EU is "pushing a clutch of countries into contractionary policies at the same time. These will feed on each other, creating a deflation bias across the region akin to the 'Gold Bloc’ in the 1930s".

"It is not a viable policy. Weakening demand will cause the tax base to shrink. If the population could see light at the end of the tunnel, they might put up with it, but there is no light: it is a long dark passage leading nowhere,".

"The EU cites the Irish austerity plan as a model, but Ireland has an open economy with a dynamic export sector, and may be sui generis. In any case, Ireland’s nominal GDP has fallen 18.6pc, without a commensurate fall in debt. Ireland is not yet safely out of its debt-deflation trap".

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U.K's New Coalition Government Plans Breakup of Big Banks And A New Financial Tax

The TBTF (too big to fail) financial institutions are a problem not only for the U.S. The U.K.'s new coalition government has pledged to establish an independent commission to decide whether to break up the banks. This according to an article by the Telegraph today.

The Conservative and Liberal Democrats agreed on banking reform, including included a pledge to

  • introduce an extra tax on the industry
  • robust action to tackle unacceptable bonuses.
The comission has been given a period of one year to report on whether separating retail and investment banking will "reduce systemic risk".

"Both parties have argued for a break-up, but the Tories want to limit the split to the 'casino' activities of proprietary trading while the Lib Dems wish to go further and "separate low-risk deposit taking banking from high-risk investment banking".

In addition, to ensure a regulatory "underlap" that left huge holes in banking supervision does not occur again, a new financial stability committee comprised of FSA and Bank representatives will be created.

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Wednesday, May 12, 2010

Not Only GS, But Also Bank of America, Citi, and JPM has Perfect Trading Days, 61 Days in a Row

This is easy (and some may say only doable) if you know in advance what the stock market will do on a given day.

We reported on the perfect trading record that GS had in Q1 2010, besting its previous quarter which was astronomically good in term of percentages. The New York Times now has an article commenting that the feat was also achieved by C, JPM and BAC. Did anyone say collusion?

"...the four giants of American finance managed to make money from trading every single day during the first three months of the year.

"Their remarkable 61-day streak is one for the record books. Perfect trading quarters on Wall Street are about as rare as perfect games in Major League Baseball"

"Each [of the firms] finished the period without losing money for even one day".


“This is not about hitting home runs,” said Jaidev Iyer, who runs his own risk management consulting firm, J-Risk Advisors. “This is just, as we call it, milking the market and your captive client base.”

  • JPMorgan's trading revenue were $90Mon 39 days during the first quarter, and exceeded $180M on 9 days.
  • Goldman Sachs posted its first perfect quarter ever. Goldman made at least $100 million on 35 days during the quarter, and at least $25 million on the remaining trading days.
  • Citi also had a perfect quarter.

And we were wondering why the stock market was relentlessly going up.

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Gold Soars: Yamana Straddles Up +80%

These are results from the straddles posted April 28 on our favorite gold company, Yamana, AUY. ROI so far is +80%:

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Tuesday, May 11, 2010

ECB Official: $1T Package Is Not Enough To Save Eurozone

Agencia Estado in Brazil reports that the European rescue package of 750B euros (approx USD $1T) will not be enough to save the eurozone structurally, this according to an European Central Bank official.

Nout Wellink, member of the governing council of the European Central Bank (ECB), told the Dutch daily NRC Handelsblad that countries with debt problems like Greece need to get their budgets in order to prevent crises from developing.

Wellink, who described the bailout as "unprecedented," said the root of the problem is in the budget difficulties of the southern countries of the European Union.

"This problem needs to be solved, since the safety net is only temporary in nature,", he added.

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Fed to Be Audited (Senate Vote: 96-0), Roubini Worried

The U.S. Senate voted today 96-0 to approve a one-time audit of the Federal Reserve. They will also have to release the names of institutions that received portions of the $2T in loans the central bank made during the peak of the financial crisis.

The measure, spearheaded by Vermont’s independent Senator Bernie Sanders is a compromise; one that's more specific and not as far reaching as the House's 'audit the Fed' bill championed by Rep. Ron Paul.

Roubini Worries

Yahoo reports that Nouriel Roubini is worried. he was quote as saying:

  • “There's a delicate trade-off,”
  • It’s important the Fed is held "accountable” for its bailouts and its role in monetizing the debt, but he's "wary" of the audit
  • if the "Fed loses its independence that's going to be bad idea.”
The Senate provision is a one time-only event to be conducted by the Government Accountability Office.

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Oil Up or Down, UCO Play for This Week

Oil inventories to be released tomorrow and with UCO trading near $11.57, here are today's straddles. Note that there are under 2 weeks to expiration so the risk starts to increase here.

Computed with StraddlesCalc Tool. Indicates a max. move needed of about 10%.

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

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Kitco, Barclays, and Societe General Forecast Gold to Drop to $680 and $800

No doubt, the collapse of the Euro and the rise of the US dollar will have a major effect on the price of gold. Kitco, Barclays, and Societe General are all forecasting gold to drop to $800 or lower.

Today, Jon Nadler, senior Analyst at Kitco, was interviewed on BNN (re. fascinating Rhodium) and reiterated the forecast: gold to drop to between $680 and $800. This is based on fundamental supply and demand. Mr. Nadler says that last year there was an oversupply of 500 tons of gold.

Yesterday, he wrote an article on Kitco's site about gold prices.

Watch interview.

Says Nadler:

"Meanwhile, following last week’s call for $800 gold by Barclays, another firm has joined the ranks of those calling for an eventual adjustment in the value of the yellow metal. This time, that similar kind of prognosis comes from investment bank Société Générale which is projecting gold prices to turn down and trade below $800 by the end of this year.

Recall that the Barclays projection allowed for a return to that number by perhaps as late as the end of 2011 or the beginning of 2012. SocGen bases its outlook on a stall in investment demand for the yellow metal. Its analysts opine that such reduction in demand by spec funds and other investors is not likely to be offset by an equivalent recovery in jewellery fabrication demand. The fact that gold prices fell quite substantially on faltering investment demand during the Dec-Jan period, and once again in March, was cited by SocGen as a potential harbinger of more of the same, later in 2010.

Clearly, spec fund activity continues to dominate gold’s price patterns for the moment, and is overshadowing otherwise feeble market fundamentals. This could continue for so long as the fear premium is maintained by turbulent external conditions. SocGen analysts note however, that investment activity is clearly not the only price driver in the gold market, even if it is currently the bullish influence (perhaps in addition to the fact that central banks have not come to market with much-if any-gold at all since the year started)".

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Gold Hits New Records, How to Trade It

INO has just released its latest analysis on gold (about 1 minute video):

Watch video.

To try the tool yourself, please use this link (gives you 2 months free, and risk-free)

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Rosenberg: Europe Shock and Awe Bailout Plan Means Recession to Perpetuity

So $1T bought us... only 400 points on the Dow index. An indication of the current sad state of affairs. In addition, by offering to do QE it lost the ECB most of its credibility, overnight.

The conditions for accessing the bailout funds are strict and will require significant tightening. Spain has unemployment over 20%. The government tightening expenses does not increase employment, certainly not initially. In fact, GDP will be reduced, tax revenue drops, and chances are deficits as percentage of GDP increase. How on Earth they will make it without devaluing the currency (since that is the Euro) is a huge enigma.

David Rosenberg today states that if Europe were to revert to the 3% deficit ratios (which are required by the Maastricht criteria), this will reduced European GDP by 1% per year and it will be particularly tough on the PIIGS countries. The numbers for them are really scary:

  • Ireland: -4% GDP, annually
  • Greece: -3.5% GDP, annually
  • Spain: -2.8% GDP, annually
  • Portugal: -2.2% GDP, annually
  • Italy: -0.8% GDP, annually

That is "recession to perpetuity".

And it's not only the PIIGs:
  • France: -1.1% GDP, annually
  • Belgium: -1.0% GDP, annually
  • Netherlands: -0.8% GDP, annually
Germany also will drop -0.1% GDP, annually

Those are reductions every single year for the next three years.

Rosenberg adds:
  • Greece is the same canary in the coal mine that Thailand was in 1997, and that New Centure was in 2007. The risks are still high that it spreads to Portugal, Spain, Italy, even the U.K.
  • The uncertainty is much wider that it was before.
  • More downside on the short term
As for the Euro, please see our various FXE posts on how to profit from its going higher or lower.

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European Bailout Is A Giant Ponzi Scheme And Giant Moral Hazard; Euro To Suffer

Europeans are waking up. Quoted by Bloomberg, the European bailout package is “a kind of Ponzi game at the highest level,” Stephan Kolek, a strategist at UniCredit SpA in Munich. It risks creating “more debt instead of cutting debt, as it obliges EU countries to buy troubled debt from member states.”

The Euro is dropping badly today back to "pre-bailout" package. FXE straddles anyone?

Did they really expect to make the Euro stronger by flushing Euroes down the toilet of the fiscally irresponsible countries?

"Germany, France and the three other largest top-rated euro area states may compromise their AAA grades by standing behind the debts of weaker members with their 750 billion-euro ($955 billion) stabilization fund".

Moral Hazard Increased Exponentially

The Germans are fuming too. According to Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, the rescue package, risks compromising the independence of the European Central Bank, It is also part of a process that is increasing so-called moral hazard “exponentially”.

The package “is not particularly pro-growth,”. It may “be looked back on as a landmark day for the ECB. Their total independence may now be increasingly questioned.”

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Monday, May 10, 2010

Roubini: Break Up the Banks; Prevent Them From Short Term Borrowing, Pop The Bubbles

Nouriel Roubini has an article on Newsweek this week, with co-writer Stephen Mihn. Some of his points:

  • Many of Obama's reform proposals are good, but they don't go far enough.
  • More drastic changes can and should be imposed, including breaking up big banks and imposing new firewalls.
  • Use monetary policy to prevent speculative bubbles.
  • The recent crisis highlighted the "too big to fail" problem: many institutions had become too large, leveraged, and interconnected; their collapse could have systemic and catastrophic effects
  • Those banks are not only too big to fail, they're too big to exist, and too complex to be managed properly. They should be pushed to break themselves up.
  • Reinstating Glass-Steagall would be good but not good enough. What is needed is a 21st-century version of the legislation that creates new firewalls.
  • Investment banks and broker dealers should be banned from doing any kind of short-term borrowing.

Commenting on the banks' claim that the global economy today can't function without them, he says that this is preposterous: "the financial-supermarket model has been a failure". he cites Citi as a prime example of unmanageable;e company selling thousands of products and services.

He adds that even "healthy" firms like GS are threat. "Not that you would know it listening to the firm's CEO, Lloyd Blankfein, who in early 2010 defended handing out record bonuses by claiming, 'We're very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose'.

To this Roubini says: "Spare us."


On bubbles, he says: "Apologists for the status quo argue that central banks can't intervene against rising asset prices because of 'uncertainty.' This is nonsense: uncertainty doesn't stop central bankers from targeting inflation; it shouldn't stop them from countering bubbles, either".

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Euro Flatly Rejected at 1.30, Needs a 10T Bailout

The Euro was flatly rejected at 1.30, and did not hold 1.28 either. Perhaps they need a $10T bailout.

Of course issuing 1T debt in exchange for debt is very bad for the currency.

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Roubini: Europe's $1T Bailout Still Has Conditions and Open Questions; Europe Was on Verge of Precipice

New York University professor Nouriel Roubini said European leaders realized they had to “get their act together” after weeks of delays agreeing a support package for debt-stricken nations threatened to destabilize the euro.

Bloomberg radio reported today that Roubini said that European nations were on the verge of a precipice, and "they realized they had to pull resources together, act together, otherwise the risk was the collapse of the euro zone, the collapse of the euro.”

“For the last few months, the European Union looked behind the curve, they couldn’t get their act together,”

“In the short run, it is going to calm the markets,” However, there is an “open question” on whether countries such as Greece, Spain and Portugal will be able to accelerate their budget deficit reduction plans".

“While money is available now on the table, it’s conditional on fiscal adjustment, structural reform,” “Whether they are going to be able to do it fast enough is an open question.”

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Moodys (MCO) Down 11% on SEC Notice; Straddles +76%

The attack on the rating agencies continues. Moodys is down 11% today, this on a day that the market is soaring.

"The company did its own review of how it rated the risk in 2008 and found that it had erred in the way it rated some debt obligations. The ratings are unrelated to the mortgage backed securities for which the agency is already under fire."

May 6 we posted straddles on MCO. Here is an update, May straddles are up +76%, so far.

Computed with StraddlesCalc Tool

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