Monday, August 31, 2009

The Fed's Interesting Week

by Ron Paul

It has been an interesting week indeed for the Federal Reserve. Early this week, it was announced that President Obama intends to reappoint Fed Chairman Ben Bernanke to a second term in January, signaling a vote of confidence in him. Bernanke seems to be popular with the administration and with Wall Street, and with good reason. His lending policies have left big banks flush with newly created cash that covers up old mistakes and allows for new ones. By buying up mountains of Treasury debt he has also enabled spending to soar to ridiculous levels that should startle any responsible economist, and scare any American concerned about the value of the dollar. However, these highly sensitive decisions about our money are not made by economists, they are made by politicians. Bernanke, like most of his predecessors, is the politician's best friend. However, there is no reason to believe any other central planner would behave any differently, considering the immense political pressure on the Fed.

Fed policies have been as bad for the economy as they are good for politicians and bankers, as the recently released numbers on the debt and deficit demonstrate. For the first time since World War II the annual budget deficit is projected to be over 11 percent of the nation's gross domestic product. It is also projected that by 2019 the national debt will be 68% of GDP. Our path, if unchanged, is completely untenable.

The administration claims that it inherited a dire situation from the last administration, which is absolutely true. However, that hasn't stopped them from accepting all the policies and premises that got us here, and accelerating those policies to rapidly make a bad situation much worse. The bailouts started with the last administration. They have gotten bigger with this one. The last administration gave us expanded government involvement in healthcare with a new prescription drug benefit. This administration gave us a renewal and expansion of SCHIP, and now the current healthcare takeover attempts. In reality, we can afford none of this, but shady monetary policy allows Washington to continue along its merry way, aggravating all our economic problems.

Not everyone in government finds it acceptable that the Fed wields so much power and privilege in secrecy. Last week, a federal judge ruled against Fed secrecy, compelling them to release under the Freedom of Information Act information regarding which banks received emergency loans, and under what terms. The Fed will, of course do everything in its power to fight this ruling and it is certainly not the last word on the issue. Still, it is encouraging to see that the interests of the taxpayers were defended victoriously in court, while the Fed only sees the plight of its big banker friends.

Meanwhile HR 1207 and S604, legislation to open up the Fed's books to a complete audit, continue to gain momentum in Congress as the people continue to insist on real transparency of the Federal Reserve. One way or another, the days of Fed autonomy are coming to an end, as well they should. No one should have the power to debauch the currency and gut the economy as they do. It is time they answered for their actions, so the people can understand that we truly are better off with freedom instead of Fed tyranny.

Our gold is going away

Voltron says: There are a lot of shady things that go on in the gold markets. This article asserts that more than half of the US gold reserve was exported in the last two years. Make sure you don your tinfoil hat while reading this.

Fed indirectly buying Treasuries to prop up dollar

Voltron says: The FED is buying Fannie Mae and Freddie Mac ("agency") paper from foreign central banks with the quid pro quo that they will buy U.S. Treasuries in order to prop up the dollar.

Tuesday, August 25, 2009

Pre-paid college tuition

Voltron says: States are losing money on this . . . If you're enrolled, their loss is your gain.

Hot Waitress Index

Voltron says: Keep a weather eye for vanishing winsome hostesses. Hopefully
not too soon.

Banks Sitting on Bad Mortgages

Thursday, August 20, 2009

ProShares Launches Short Treasury ETF

Lessons from Crazy Eddie

Voltron says: Anyone who lived in the New York City area in the 1980's remembers "Crazy Eddie". It was an electronics store chain with an ad campaign featuring a frenetic radio show host . . . Their prices were "Insaaaaaaaane!". The company was also a massive fraud from the beginning. NPR's "Planet Money" interviewed their CFO Sam Antar

Crazy Eddie was underreporting their sales and skimming the New York City sales tax (a whopping 8.5%). Their CFO said, the joke at the time was that if New York City eliminated their sales tax, half the mom and pop shops in the city would go out of business, implying that skimming sales tax was how most small businesses stay solvent! This flies in the face of academic economic wisdom, which is that eliminating the sales tax would be good for businesses. It reminds me of the scene from "Back to School" where Rodney Dangerfield is explaining why his business professor's example construction budget is bunk: "Well, first of all, you're gonna have to grease the local politicians for the sudden zoning problems that always come up. Then there's the long-term costs, such as waste disposal. I don't know if you're familiar with who runs that business, but I assure you it's not the Boy Scouts." After Crazy Eddy became publicly traded, they slowly moved their off-the-books business back on the books to give the illusion that their business was growing in order to inflate the stock price.

I'm always fascinated by frauds. I've become convinced that the economy is completely dominated by fraud and criminal activity. The biggest cash crop in the United States is Marijuana. Credit Card fraud is larger than the entire illegal drug trade. During the S&L crisis of the 90's almost every bank committed fraud. When Fitch recently looked at individual mortgage files, they found "the appearance of fraud or misrepresentation in almost every file." I'm certain that all the major banks are insolvent and have committed massive frauds. After all, how can you compete with frauds when the government is complicit? To paraphrase Balzac: "behind every great fortune lies a great crime."

Former S&L regulator William Black has done a lot of great work on this. One of the first things he did was limit the growth of S&Ls. This seems counter-intuitive, but makes sense because all ponzi schemes must grow otherwise they implode, so it's a very easy way to ferret them out and limit the damage. With the current banking crises, the FDIC is doing the exact opposite by giving banks a pass to allow them to "earn their way out" of the red (i.e. grow). By the time the FDIC finally takes action, the losses are huge.

Saturday, August 15, 2009

Wells Fargo: Whatever Happened to Bank Bears? -- Seeking Alpha

Voltron says: "free thinking maverick" Reggie Middleton's latest, well
researched article on wells fargo

Monday, August 10, 2009

Off Topic: USAA lets you deposit checks with iPhone

Voltron says: You can use the iphone camera to photograph the front and
back of a check and USAA will deposit it electronically. I think the fact
that the camera on the iPhone 3GS can focus in close opens up many
possibilities: business card scanner, document scanner, barcode scanning.

[This is completely off topic and is not a statement about Apple stock.]

Friday, August 7, 2009

Is it Time To Short Wells Again?

August 7, 2009 – 3:07 pm
by Teri Buhl for

The smart money has turned bearish on Wells Fargo again.

Yesterday, rapid put volume and big block buys on the September 26 strike price had hedgies buzzing. On Thursday WFC traded 87,500 calls against 194,000 puts for 2.20:1 put/call ratio. That type of unusually volume set off alarm bells, as clients received email alerts to big institutional money turning negative on the stock.

Two well-known bank analysts said they got a rush of calls mid-day from their top hedge fund clients sniffing around for the name of the block buyer. According to traders on the CBOE and sources inside the firm’s trading operation it was none other then the recently-hailed trading profit leader Goldman Sachs. CBOE trading records show the put buyer traded around 30,000 contracts at the September 26 strike price paying $1.05 and $.1.10 between two big blocks.
Meaning: Goldmanites and other smart money are betting Wells’ stock gallop is over and the sharp reversal in bearish activity is a ‘tell’ sign that a downside move is in the near future.

Andrew Wilkinson, market analyst at Interactive Brokers Group said, “This was a very well-researched, well-timed turn on Wells Fargo yesterday.”

Pete Najarian, of, warns to be cautious on Well Fargo, while his Fast Money buddy Guy Adami said on yesterday’s show he’d ride a full-blown short now. FBR Capital Markets analyst Paul Miller has a current price target of $15 on the stock and recommends to short the heck out of it while it’s so overvalued. Famed short-sellers like Jim Chanos and David Einhorn, who successfully shorted Wells in the past, have likely been ramping up their short positions while the stock is flying at a high.

WFC hit a high for the year today at $29.34. Data Explorers says there has been a rapid increase in the short base this week, rising from 1.5% to 2% of shares outstanding on loan.
Why all the recent souring on the mortgage banking giant, considering they blew analyst EPS estimates out of the water again (by over 40%) for the second quarter? Because once again, it’s believed that Wells Fargo is playing accounting tricks to show paper profits like they did in Q1, this time off of goodwill from their Wachovia purchase.

Wells Fargo — which has a strange practice of never answering analyst calls when they announce earnings — will publish their 10-Q next week, sending data combers to scour through the details to try to find where the core pre-provision earnings really are.

According to Paul Miller’s team there are a few key data points that just don’t add up. One red flag they present is that mortgage rate movements in the quarter were not enough to justify a billion-dollar write-up in their mortgage servicing rights. Another is the fact the non-performing assets accelerated 45%, with an increase of $5.7bn over last quarter, yet the bank reserved only about half what it did the quarter before, at $700m for future loan losses. And this isn’t the first time in recent months analysts have complained bitterly that the bank was playing around with loan loss reserves for the purpose of boosting profits.

Miller — who doesn’t think the bank’s net charge-off or non-performing assets are going to decrease anytime this year, given the lagging job market — continues to warn that they are simply not managing their credit cost. He writes in a note to clients on July 22, “WFC will have to materially increase its provision expense, which will put pressure on earnings and valuations.”

Main street and most of the financial press still seem to be enamored with the talked-up-by-Buffett Wells; but the institutional money is starting to place its bets — based on extreme skepticism with a firm which has allowed serious questions to fester about how they’re really making their profits.

Wednesday, August 5, 2009

About half of U.S. mortgages seen underwater by 2011


NEW YORK (Reuters) - The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.