Moody's under the gun

Voltron says: will the SEC do anything this time?

http://online.barrons.com/article/SB122792676800266213.html

SRS flow

http://online.wsj.com/article/SB122773513381860923.html?mod=yahoo_hs&ru=yahoo

Questions for Peter Schiff

I will be attending Peter Schiff's client-only conference in San Francisco on Sunday. I plan on asking him about shorting bonds. If you have any other questions you want me to ask, post them in the comment section of this message.

Meredith Whitney Says Citi is a Goner

Voltron says: breaking news is that citibank is getting another 20
billion and 300 billion in guarantees.

Here's why

http://www.nakedcapitalism.com/2008/11/meredith-whitney-says-citi-is-goner-bbc.html

Is the Price of Gold Being Supressed? - Seeking Alpha

http://seekingalpha.com/article/107423-is-the-price-of-gold-being-supressed

SEC does nothing about ratings agencies

Voltron says: The do nothing Securities and Exchange Commission does nothing about fraudulant ratings agencies. And chief offender, Moody's (MCO), whose stock is plummeting is officially smoking crack.

Run on Gold Coins overwhelms mints

Voltron says: another article on gold and gold coins:

http://www.nypost.com/php/pfriendly/print.php?url=http://www.nypost.com/seven/11182008/business/governments_cant_handle_global_run_on_go_139306.htm

rumor: Gold will be money again

Voltron says: word on the street is that China, Saudi Arabia and Iran are moving into gold. There is serious discussion of a new gold based international monetary system (a la Bretton Woods)

http://irishliberty.wordpress.com/2008/11/16/china-to-pull-the-plug-on-the-usd-switch-to-gold/
http://ml-implode.com/staticnews/2008-11-16_AreturntotheBrettonWoodsinternationalgoldstandardisinevitable.html
http://seekingalpha.com/article/106181-what-does-the-recent-saudi-gold-rush-mean

For those of you just tuning in . . .

The US Dollar has to go

It is clear that the United States has relied on a continuous cycle of debt growth to fuel its economy. The engine of the US economy has been the US consumer, and consumer debt had to expand at a rate that far outpaced negligible consumer income growth in order for the US economy to continue to "grow."

Expanding the amount of money and credit is easy under a fiat system when your currency is the world's reserve currency. The US has, for years, been able to create new money out of thin air at will, with no meaningful monetary penalty extracted by its trading partners.

by Christopher Galakoutis, CMI Ventures LLC

Easy money at home gave rise to inflationary pressures in homegrown industries and services. Understanding full well there can be no economic growth where the purchasing power gained from expanding consumer credit is all but nullified by rising inflation, modern day economists, along with an all too eager public support seeking war-time government and profit thirsty CEO's, came up with a plan in 2001. It was full throttle ahead for the outsourcing movement.

With the prices of their big screen TV's and other imported goods falling, the American people were fooled into believing there was no inflation, as the rising costs of life's necessities back home had been camouflaged, as it were, by the falling costs for everything else. The average consumer was left par for the course after all was said and done, and feeling pretty good about things, as the easy flowing credit initially provided all the good, such as rising home values, and none of the bad.

More outsourcing meant more Americans losing their jobs, and joining their neighbors in the unemployment line, instead of the shopping mall checkout line. Jobs that used to support income growth, as well as a solid tax base for the cities, states and federal government, had been moved offshore, in the short-sighted search for votes and higher stock prices. There would soon be fewer American consumer dollars filling foreign coffers.

As more people struggled and were unable to make their mortgage payments, the economic realities of millions of Americans finally began to dawn on even the most optimistic. Housing prices would soon collapse, as fewer and fewer Americans could afford to pay sky-high prices. Greater fools are always milling around, but the jig was up on lending vast sums of cash to greater fools with no jobs.

Like the cheating student relying on the kindness of those sitting beside him during exam time for a passing grade, so too the US has relied on the kindness of foreigners for the maintenance of the American standard of living. But such fantasies can only last for so long. Like the parents of our little swindler, the American people, as well as America's foreign creditors, would soon learn that all was not what it was cranked up to be.

That is where we are today. The trillions borrowed by the US government and US consumer cannot be paid back with dollars of equal value. A country with no domestic savings from which to draw, angry foreign creditors and with a collapsing tax base has few options. US debts will have to be paid back with printed money. Money printing will cause a severe inflationary depression in the US, meaning it is time for Americans to hunker down. Americans need to reduce spending, buy some gold, and get rid of the gas-guzzlers and vacation homes -- downsizing is survival in the years ahead.

The worldwide crash in equity markets is the rest of the world coming to terms with this reality. A decoupling from the US, both financially and economically, would save the rest of the world -- home to well over 90% of the world's consumers -- but only if they move quickly. Akin to a drowning man holding on to the legs of a would-be survivor, the rest of the world, our would-be survivor in this case, has been trying to figure out how to be a hero. When the would-be hero realizes he too is at death's door, one swift kick jarring himself loose will be the only option.

It is time to extract a penalty and exercise that option. The US dollar has got to be replaced as the world's reserve currency.

 

Things to worry about

Voltron says: I’m not concerned about today’s technical rally (In fact, I bought more SRS at 135)  Here are some things that do concern me.

 

The following article raises the possibility that China will sell US Treasuries to finance it’s stimulus at the same time the US is trying to issue new Treasuries to finance it’s stimulus.

http://www.reuters.com/articlePrint?articleId=USTRE4AA7ZY20081111

 

This article gives a fair description some real risks to investing in gold

http://seekingalpha.com/article/105825-gold-bugs-beware

 

Finally, this article outlines some of the possible warning signs of the move towards inflation

http://seekingalpha.com/article/105828-lower-prices-now-massive-inflation-later

Today's Rally

Voltron says: Well, it looks like 8,000 is solid technical support for now.  I don’t believe for a minute it was bargain hunters buying that initiated it.  It was likely short sellers taking profit.  If the market falls again quickly, the short sellers won’t be there this time to catch it.  More importantly the dollar did not show weakness, so I don’t think we’ve turned the corner to inflation yet.

Cracks forming in commercial real estate

Voltron says: General Growth Properties (GGP) may be bankrupt and is removed from the S&P 500 index. ProLogis (PLD) cuts it's dividend, CEO resigns. Both stocks are included in SRS. When the subprime lenders went down, they went one by one because Wall Street refused to acknowledge that THEY WERE ALL THE SAME. Same thing is happening here. GGP and PLD go down in isolation, is if they are messed up oddballs, when in fact they are representative of the industry and the only reason they are going down first is that they are in the wrong place at the wrong time.

links:

http://seekingalpha.com/article/105690-reits-are-gold-mines-on-the-short-side
http://biz.yahoo.com/ap/081112/general_growth_properties_mover.html?.v=2

Still deflation

http://biz.yahoo.com/ap/081112/credit_markets.html?.v=4

Scary Charts

Voltron says: This chart from the Fed depicts the solvency of Banks. Click for a larger view.



more scary charts here

Peter Schiff on gov't mortgage plan

Voltron says: Below is Peter Schiff's take on the government's new mortgage modification plan.

By offering to reduce mortgage payments to 38% of household income for homeowners who are 90 days delinquent, the mortgage program announced today will spark a new wave of delinquencies. In a classic case of unintended consequences, the plan will encourage homeowners to rearrange their finances to qualify for the benefit. Those who could conceivably economize to meet their existing obligations will now have a strong reason to forgo such sacrifices.

The intentional reduction of income is also a possibility. In many cases dual-income families may decide to eliminate one job altogether as reduced mortgage payments combined with lower child care and other work-related expenses will likely exceed the after-tax value of the lost paycheck.

It may also be tempting for some homeowners to temporarily quit high-paying jobs, or delay job searches, and accept low-paying jobs while the creditors consider their fate. Once their mortgage payments have been modified to fit their diminished incomes, these homeowners would then be free to pursue better-paying jobs. With mortgage payments reduced to a fraction of their prior payments, these workers will have much more employment flexibility than those foolishly struggling to meet non-modified mortgages.

Liar's Texas Hold 'em

Voltron says: Great article by Michael Lewis, author of "Liar's Poker", about how guys from Queens could predict the subprime collapse.

Excerpt:

He couldn’t figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. “I didn’t understand how they were turning all this garbage into gold,” he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. “We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

As an investor, Eisman was allowed on the quarterly conference calls held by Moody’s but not allowed to ask questions. The people at Moody’s were polite about their brush-off, however. The C.E.O. even invited Eisman and his team to his office for a visit in June 2007. By then, Eisman was so certain that the world had been turned upside down that he just assumed this guy must know it too. “But we’re sitting there,” Daniel recalls, “and he says to us, like he actually means it, ‘I truly believe that our rating will prove accurate.’ And Steve shoots up in his chair and asks, ‘What did you just say?’ as if the guy had just uttered the most preposterous statement in the history of finance. He repeated it. And Eisman just laughed at him.”

“With all due respect, sir,” Daniel told the C.E.O. deferentially as they left the meeting, “you’re delusional.”

This wasn’t Fitch or even S&P. This was Moody’s, the aristocrats of the rating business, 20 percent owned by Warren Buffett. And the company’s C.E.O. was being told he was either a fool or a crook by one Vincent Daniel, from Queens.

Full Article: http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom?print=true

Use your financial losses to your benefit

By DAN SERRA - McClatchy-Tribune News Service

No one likes to see their investment portfolio tumble as it did in October, but the downfall is not all bad news for taxpayers. The lower stock prices provide an opportunity for saving on income taxes come April 15 and beyond.

Usually we think of strategies to prevent us from paying taxes on higher incomes when the markets are doing well or our job is paying well. It actually works both ways. So if you're depressed over losing money, cheer up. Here's ways you can use those losses to your benefit.

1. Convert to a Roth IRA: With portfolio values lower, traditional Individual Retirement Accounts can be converted to Roth IRAs. Why now? When you convert, tax is due on the amount converted. If your IRA is down to $100,000, for example, from $125,000, you'll pay tax on $100,000 instead of $125,000. And when the value recovers over the years and it comes time to take it out in retirement, withdrawals will be tax free. Since conversion values are considered ordinary income, watch that it doesn't push you into a higher tax bracket. You may want to convert only a portion up to the limit of your current tax bracket.

2. Reverse a Roth conversion: If you converted earlier this year (when it was $125,000 in our example above), you could reverse it now and take your chance the value will still be lower next year and do another conversion after Jan. 1, unless it's in December, in which case the next conversion has to be at least 30 days later. Conversions can be done only once a year.

3. Write off losses: Selling stocks at a loss gives you a tax deduction for the amount you lost in the sale. If your $10,000 stock, ETF, bond or mutual investment is now worth $8,000, you'll get a $2,000 deduction, called a capital loss. You can deduct up to $3,000 in losses a year, with anything more carried over to the following year's taxes. If you still believe in the investment, you can buy it back after 30 days. The IRS does not allow a sale and buyback within 30 days in order to claim a tax loss.

So cheer up, you may have lost money in investments but you can get a lower tax bill.

Fed has lost control

Voltron says: interesting article about how the Federal Reserve has lost control and is running out of tools.

 

http://ftalphaville.ft.com/blog/2008/11/06/17903/fed-capitulates-the-central-bank-is-broken/

 

MEREDITH WHITNEY CNBC INTERVIEW

Below is the loosely translated interview. - Click HERE for video.

Maria: What changes with an Obama Presidency for the banks?

Whitney: Financials and the economy are so far off the tracks its hard to see anything helping right now. One thing they talked about was mortgage modifications - trying to get money to consumer.

None of this makes banks have a higher appetite for risk so you don’t see a lot of money coming into system aside from govt subsidies. So the banks will make less if they modify your loan. They will be siting on sludgier assets. That doesn’t create new capital to get back into the system.

Higher taxes are assoc with Dem’s but there it less to tax…one good thing about all of this.

Maria: You were the first to point out the upset in financial industry - please tell us where we are in cycle?

Whitney: We are in a new part of cycle. We have digested the fact that the securitization is not coming back. Securitization made up 85% of mortgages and 50% of credit cards. Market is not coming back. Contraction of capital is one thing. But what happens going forward is contraction of the overall mortgage market - this has never happened before.

Banks are not lending. Originations are down big in q3. Loan balances getting smaller. Credit cards make up over $2 trillion in available credit lines being pulled out of system. Credit is being taken away form those that got credit in the past 15 years. Never in America had we seen this before. This is a more destructive market for consumer. This is not factored into market.

An economy that has already been impacted by market and unemployment going to double digit levels is another wild card for banks.

Banks just will not make a lot of money and the street is still expecting them to make a lot more money. My estimates are 30-70% below the street and i think I am too high.

Maria: 70% below the street - oh my. Its going to be tough to make those up - the street still expects them to make lot?

Whitney: Banks asset base gets smaller so revenue gets smaller. They can’t cut costs fast enough to keep up with declining revenue. Credit costs increase and you are running faster to collect on loans. So you just have a protracted period of negative operating leverage.

Many of the banks, especially the two brokers, expense structure grew so fast over the past several years that their expense structure is built for a 06-07 revenue environment and their revenue will be like 01-02 revenue environment.

Maria: How much of this is priced in how much will this be a surprise? stocks are down so significantly.

Whitney: Citi, UBS, Wells Fargo, JP Morgan and BofA at all these levels est are coming down dramatically. Nobody is immune. believe it or not, analysts think losses will be more milder than they really will be.

One difference between my est and the rest of the street has been a higher loss curve estimates for losses than others. But my loss estimates are actually lower than the reported numbers. I think we are in for a rude awakening. That may result in a slow grind down in these stocks.

I don’t think you will see massive capital destruction like we saw with huge write downs but I will bet a lot of money banks will come back for a lot more money on the next 9-months again so you will be diluted further. Now, from Obama you will see more regulation. They are a highly regulated utility with less dividend. Y should expect Citi and others to cut dividend.

Citi already cut but nobody is allowed to raise under TARP. But earns will be so much lower alot of companies will not be able to support dividends so yes they will cut again.

Maria: How significant of a fall will be see in these stocks?

Whitney: I think Citi goes to the single digits.

Maria: Who is best position and will go higher?

Whitney: There are many I like and I hope they can hold onto being independent, but stock prices are far too high.

I think you know JPM and BAC survives. There are alot of attractive companies.

Wells Fargo at $20 is attractive. They have a $20 billion offering in the works and that stock is still hovering near $30! That stock still has a ways down to go.

Wells Fargo is gonna be a great company and will be a survivor but consensus estiates are on Pluto. They will have a (equity) supply jam in terms of extra capital into the market and you will see a great chance to buy a great stock you want and much lower prices.