Monday, November 30, 2009

How Economic Weakness Endangers the U.S.

Harvard prof Niall Ferguson predicts higher real interest rates and decreased US military spending.

China, gold, and the civilization shift

Mr Jen is an expert on sovereign wealth funds from his days at Morgan Stanley. The gold story — essentially — is that the rising economic powers of Asia, the Middle East, and the commodity bloc are rejecting Western fiat currencies. China, India, and Russia have all been buying gold on a large scale over recent months.

Tuesday, November 24, 2009

Still making bad loans

High End Housing is Weak

Voltron says: high priced houses are not being supported or subsidized by FHA, VA, Fannie, Freddie, Ginnie, First Time Home Buyer Tax Credit, etc., so that is where weakness is showing.

Short sellers are returning

Excerpt: Short interest on the New York Stock Exchange and Nasdaq edged
higher in early November, data from the exchanges showed on Tuesday,
signaling that some investors are betting the equity run-up might hit some
turbulence as 2009 winds down.

Voltron says: Fortunately, I got out of all my short positions in March
( I started
re-shorting Wells Fargo at an average price of $20. (It's $27 now . . .
Ouch) If you're looking for something to short . . . I recommend Wells
Fargo. They are bankrupt 3-4 times over by my estimate.

House Party

Voltron says: how come I never get invited to parties like this?


•In San Diego County, young people have taken over foreclosed houses for late-night rave parties, says Detective Jeff Lauhon of the San Diego County Sheriff's Office. Lauhon says the culprits were well-organized in some instances: A young couple would get a realtor to give them a tour of a foreclosed house — usually in a rural area on a large property. The woman would distract the realtor while the man surreptitiously left a window open or door ajar. They would then return and invite others for parties that lasted until the wee hours.

Monday, November 16, 2009

Peter Schiff in top form (video)

Voltron says: You know it's time to short when they are openly mocking Peter Schiff on CNBC

Meredith Whitney is bearish (video)

Financials are taking a hit after Meredith Whitney told CNBC that she "hasn't been this bearish in a year."

She's also calling for a "double dip" recession.

StreetInsider bullet-points her comments:

  • the banking sector is "not adequately capitalized today"
  • sees another leg down in the residential real estate market when mortgage rates/prices begin moving lower. To this point, Meredith said she feels that there is still a much bigger risk related to residential mortgage exposure, rather than commercial.
  • says that this market makes "no sense" to her and that there is no fundamentals behind the recent rally in stocks
  • within the banking sector the major difference between the market today and last year is that there is no mark-to-market now.
  • "banks will go back to tangible book value"
  • sell the banks
  • would sit on cash until another leg down in valuation, estimates
  • "everything's expensive right now"
  • expecting a double dip recession, although the second part of "W" will not be as severe

Sunday, November 15, 2009

Goldman Sachs is short Wells Fargo

Voltron says: Wells Fargo is Goldman's second largest short position at -$290 million.

Saturday, November 14, 2009

Off Topic: War and Auctions

Paying a Price for the Thrill of the Hunt

By RICHARD H. THALER, The New York Times


IF a business school professor is running short on cash, there is a sure-fire solution: run a dollar auction game in class.

To start, the professor offers to sell the class a $20 bill. Bidding starts at $1 and goes up in $1 increments. The winner pays the professor whatever the high bid was, and gets the $20. Here’s the catch: the second-highest bidder also has to pay, but gets nothing in return.

Typically, a few brave or stupid students — nearly always male — open the bidding but fairly quickly only two bidders remain and they discover they are in a war of attrition. The bidding slows when someone bids $20, but then resumes with neither wanting to “lose.” If the two students are particularly stubborn, prices can go over $50. (The professor typically gives the money to charity, or claims to.)

The dollar auction game was invented by a pioneer of game theory, Martin Shubik of Yale, and it illustrates the concept of “escalation of commitment.” Once people are trapped into playing, they have a hard time stopping. (Consider Vietnam.) The higher the bidding goes, and the more each bidder has invested, the harder it is to say “uncle.” The best advice you can give anyone invited to play this particular game is to decline.


[] sells new merchandise using unusual auction formats. Let’s concentrate on one of them, the so-called penny auction.

Typically an item — say, a laptop that retails for $1,500, is offered for sale. The bidding starts at a penny, and goes up in one-cent increments, but it costs bidders 60 cents to make a bid. Each auction has a scheduled closing time, but as the deadline nears, that time is extended by 20 seconds whenever someone bids.

The site’s home page displays several attractive objects for sale with closing times fast approaching. It is mesmerizing.


What makes this procedure so devilish is that while bidders are looking at what seem to be amazing bargains, the Web site is raking in the money. Because Swoopo collects 60 cents for each penny bid, its revenue is the selling price multiplied by 60. This means that if a computer you covet sells for $100, seemingly a bargain, Swoopo collects $6,000 in revenue, a very juicy profit.

Wednesday, November 11, 2009

World gold supply running out

By Ambrose Evans-Pritchard, UK Telegraph

Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

"There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London.

"Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.

Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa's output has halved since peaking in 1970.


Mr Norman said the "false mine of central banks" had been the only new source of gold supply this decade as they auction off reserves, but they are switching sides to become net buyers.

[Mining company Barrick Gold] is moving fast to wind down the remaining 3m ounces of its infamous hedge book over the next twelve months, an implicit bet on rising gold prices over time.

ETF Investors Are Still Fleeing U.S. Stocks

Tungsten gold


In early 2008 it was reported that at least some of the gold bars in the vaults at the National Bank of Ethiopia were fake. The discovery was made when bars shipped from Ethiopia to South Africa were returned after they were identified as being gilded steel.

Gilded steel is a very unconvincing form of fake gold because the density of the iron alloy is significantly less. . . . There are two metals that are suitable, from both a density and economic perspective, for manufacturing fake gold - uranium and tungsten.

A Chinese company called Chinatungsten is advertising imitation gold merchandise on its website. The following quote is taken directly from their Tungsten Alloy for Gold Substitution page:

"a coin with a tungsten center and gold all around it could not be detected as counterfeit by density measurement alone ... We are well accustomed to exploit more innovative applications of tungsten products. Gold-plated tungsten is one of our main products."

Monday, November 9, 2009

Key oil figures were distorted by US pressure, says whistleblower


The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.

The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

The allegations raise serious questions about the accuracy of the organisation's latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.

In particular they question the prediction in the last World Economic Outlook, believed to be repeated again this year, that oil production can be raised from its current level of 83m barrels a day to 105m barrels. External critics have frequently argued that this cannot be substantiated by firm evidence and say the world has already passed its peak in oil production.

Now the "peak oil" theory is gaining support at the heart of the global energy establishment. "The IEA in 2005 was predicting oil supplies could rise as high as 120m barrels a day by 2030 although it was forced to reduce this gradually to 116m and then 105m last year," said the IEA source, who was unwilling to be identified for fear of reprisals inside the industry. "The 120m figure always was nonsense but even today's number is much higher than can be justified and the IEA knows this.

"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources," he added.

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he added.
But as far back as 2004 there have been people making similar warnings. Colin Campbell, a former executive with Total of France told a conference: "If the real [oil reserve] figures were to come out there would be panic on the stock markets … in the end that would suit no one."

Friday, November 6, 2009

Thursday, November 5, 2009

Fannie Mae Loses $18 BILLION, Needs $15 BILLION More In Aid

More on "ruthless default"


Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

Tuesday, November 3, 2009

Wells Fargo is in denial


Wells Fargo & Co.'s strategy for modifying troubled Pick-A-Pay mortgages looks like a game of kick-the-can-down-the-road.

The fourth-largest U.S. bank by assets holds about $107 billion in debt tied to option adjustable-rate mortgages, a relic of the U.S. housing boom that allowed borrowers to make small monthly payments in return for increasing their mortgage balance. Many such borrowers now own homes worth far less than they owe in mortgage debt, and most can't afford a full monthly payment that pays down the loan's principal.

To solve that conundrum, Wells Fargo is taking a gamble: The San Francisco company is issuing thousands of interest-only loans that will defer borrowers' balances for as long as six to 10 years.

Wells Fargo is wagering that an eventual rise in housing prices in the worst-hit regions of the U.S. and a rise in consumer income, will eventually cover the bank's underwater Pick-A-Pay debt. "We're banking on the fact the economy will improve and recover over time," Michael Heid, co-president of Wells Fargo Home Mortgage, said in an interview.

The move to shift Pick-A-Pay borrowers into interest-only loans helps Wells Fargo avoid hefty write-downs on Pick-A-Pay mortgages that would likely result from foreclosures. But the strategy will leave Wells Fargo holding billions of dollars in mortgage debt tied to distressed properties in battered markets, especially California and Florida.


Gold surges to new record high

Voltron says: the IMF sold 200 tonnes of gold to India for $6.7 Billion. Normally that much supply would crush the price of gold, but instead the price surged. The reason is because the IMF had already announced that it would sell 400 tonnes of gold so the market already factored that in. The fact the India is buying it as reserves to put in a vault, never to see the light of day means that supply is basically gone rather than flooding the market.