Archive for October, 2011

Trick or Treat?

0 | By Shah Gilani

For the past five weeks, it’s been treat after treat for bullish investors.

The “trick” will be seeing if it can last…

How sweet has it been?

The Dow rose 1,459.63 points in five weeks to end Friday at 12,231.11. The Industrials rose 3.6% last week alone. They’re up 14% in that short run, and we’re now up 5.7% on the year. The S&P 500 is also up 14% over the same timeframe, and the Nasdaq has been following dutifully.

The candy being held out has been the hoped-for resolution to all of Europe’s problems. Every little sign of forward movement burned the short tails of greedy bears hoping for a sovereign default and raging contagion.

On top of progress across the pond, earnings here at home have been another treat. Of the more than 300 companies in the S&P 500 that have reported third-quarter numbers, 71% beat analyst expectations.

But, like I said, the trick now will be seeing if it can last.

From a technical perspective, we had every reason to rally.

Sentiment was near record lows. Shorts were near record highs. We’d fallen into bear-market territory by dropping 20% for a brief moment on an intraday basis. The Fed was talking turkey about the economy, and double-dip was on everybody’s pouty lips. When things get that bad and we don’t crash, there’s only one way to go…

Higher.

A few better-than-expected economic data points later, in a few short unexpected weeks, and the whole world is rallying, the sun is shining, and everything has changed.

Just kidding. Wake up. You’re dreaming. It’s Halloween, and you’ve been tricked.

Can the party go on for a while longer?

Yes, sure, for a short while… until the sugar high wears off and our decaying teeth start falling out of our mouths.

The markets are broken. Everything is broken

We are going to get rallies. There are almost always good rallies in long-term secular bear markets, which is where we are at.

About those earnings… They wouldn’t have beaten too many analysts’ expectations if most of them hadn’t lowered their estimates because of the slowing economy and dreaded European contagion fears.

About Europe’s problems being fixed… The chance of the plan to save Europe actually working is exactly zero. Do the math.

All the money, which they say they have, which they don’t have, which will be the starting point of a fund they will leverage, without any way to leverage it that anybody in their right minds would ever invest in (think CDOs in 2008) is only enough to save Greece from defaulting, for about three minutes, and enough to recapitalize all Europe’s teetering banks for about four minutes, and enough to prop up Italy’s bond market, for about six minutes.

Oh, and when the seventh minute starts, they’ll need more money all over again.

In case you missed the good follow through the plan engendered in Europe on Friday, I have some bad news. It’s about Italy, the timer, yes, that six-minute one I was just talking about, well, it started.

Italian 10-year bonds came out on Friday and nobody wanted them.

They had to offer a 6.06% yield to attract anybody. So, who bought them? Oh, that would be the ECB, buyer of bonds of last resort.

Let’s see…

Italy has €1.9 trillion of debt outstanding, €200 billion of which will have to be rolled over in 2012. And their cost of borrowing keeps going higher. Call me crazy, but isn’t that what happened to Greece, which has about one-tenth as much sovereign debt as Italy?

At least things are good here. We’ve fixed out deficits, thanks to that super-committee that’s been so harmonious and transparent. Oh, wait a minute, that was a dream.

Congress is working together and… oh wait, that’s another dream.

Where was I?

Oh yeah, TRICK or TREAT?

Be smart, don’t invest. For the time being, trade.

If after tomorrow the bull takes off his costume and he’s really a bear, don’t be surprised. If there’s a bull under that bull suit, we’ll know by Thanksgiving.

For my money, right now, I’d buy banks and use super tight stop-losses, just in case there’s momentum to this rally.

If I was a longer-term investor and I was itching to buy here, I’d by consumer staples and defensive stocks, including utilities and, of course, big dividend players. And you better bet that I’d have tight stops.

As a trader, with a negative bias, I’m adding to my short euro plays, and looking for the financials to slow their recent rise, flatten out, and turn tail, at which time I will short them, again.

I don’t care if I’m wrong. I’m not investing for the long term now. I’m trading, taking long positions, taking my profits (which I took) and looking to get short again right around here. If I’m wrong, I’ll have very tight stops, get out and reassess my positions.

I’ll leave you with this… out of the last 69 trading sessions, there were only two days where we did NOT have a triple digit intraday move. (Last Friday after Thursday’s giant move was one of them.)

That’s why I’m trading now, and not investing… yet.

Shah

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Crony Capitalism and the Eurozone Deal

4 | By Shah Gilani

Is it ironic that my new e-letter is titled Insights & Indictments, and in our very first week, along comes the actual indictment of former Goldman Sachs director Rajat Gupta?

Actually, no.

There’s nothing ironic about seeing the inevitable coming.

I would add that the six criminal counts levied against Mr. Gupta – also the former director of Proctor & Gamble and AMR Corp., and former managing director of consulting giant McKinsey & Co. – should more properly be termed an indictment of “crony capitalism.”

By the way, those five counts of securities fraud are a testament to what allegedly resulted from Mr. Gupta’s insider-tipping calls to convicted hedge fund billionaire Raj Rajaratnam.

But it’s the single conspiracy count that should be commanding the most attention.

Conspiracy is exactly what the Occupy Wall Street crowds should be protesting, because that’s what’s undermining America.

Crony capitalism is the manifestation of the conspiracy of powerful, moneyed insiders to manipulate information, trades, markets, and the economy for their own personal and corporate enrichment.

But I am getting well ahead of myself…

Mr. Gupta is innocent until proven guilty, and he very well may be exonerated. Frankly, I hope this is all a terrible misunderstanding and that these charges can all be sorted out and conspiracy theories debunked once and for all.

Then again, there are some odd coincidences that don’t really look like mere coincidences…

The First Person He Called (Twice)

According to the unsealed indictment in the case, Mr. Gupta allegedly telephoned Mr. Rajaratnam a mere 16 seconds after exiting the Goldman Sachs board meeting where Gupta learned Berkshire Hathaway was going to put $5 billion into the floundering Goldman.

Galleon Group, Rajarantnam’s hedge fund, allegedly pocketed a sweet $840,000, subsequently trading Goldman shares.

Then there was the 23 seconds that elapsed before Mr. Gupta made another call to Rajaratnam, after another Goldman board meeting where Gupta learned Goldman would post its first-ever quarterly loss as a public company.

Sure sounds like a “crony” relationship to me…

There are other specifics in the six-count indictment. And no doubt there will be many more particulars uncovered and argued over the course of the trial scheduled for the spring of 2012.

As far as criminality, conspiracies, and indictments are concerned, there’s a reason we decided to name this e-letter what we did. We’re going to see more and more indictments down the road, and there are going to be times where you’re going to hear about them here before they happen.

That’s because there’s no veil of secrecy here covering greedy, guilty co-conspirators.

Nor is there any hesitation here, on my part, to proffer my insights on the markets.

And, of course, that brings us to…

The Deal With Europe

Nothing happened Wednesday… even though something was supposed to happen.

Oh, sure, there was a deal struck, but you were probably sleeping. No worries – you didn’t miss much.

There’s almost too much to say about what a farce these meetings are. To me it’s political theater of the absurd. There is no solution, period. There are only schemes to “extend and pretend.”

For example, when Brazil was asked to pitch in to the European Financial Stability Facility (EFSF), they answered, “Pitch this.”

China, too, is being begged to pitch in. The head of the Stability Facility is headed there on Friday to meet with the People’s people.

Through the grapevine it’s being said that China might pony up something through the International Monetary Fund… but only if they can sell Christine Lagarde some fake Christian Louboutin shoes so they can walk in her old ones and take over the venerable IMF, which she now heads.

So, what is the deal?

There was an agreement to reduce Greece’s debt. The scheme calls for private banks to “voluntarily” cut Greek sovereign debt by 50%. That means they have to write down their balance sheet holdings by 50%, because they are forgiving the other half of the debt.

They figure if Greece only owes them half of what they owed them yesterday, maybe they’ll have a chance of getting paid back.

Too bad Greece owes more than €350 billion euros, and private creditors hold €210 billion of that. In other words, there’s no agreed reduction in the other €140 billion owed to other institutions, like the IMF.

(Now do you see why China might play ball through the IMF?)

The late-night leaders agreed to boost what they swear is in the Stability fund, some €440 billion, by leveraging it four or five times. Really, that’s what the communiqué says, “four or five times.” Good thing they have this figured out to the last cent. They said that should expand the bailout facility to between €800 billion and €1.3 trillion.

Far be it from me to ruin their hard summiting work by telling them that 4 times 440 is actually €1.76 trillion, and 5 times 440 is €2.2 trillion… Unless there really isn’t €440 billion in the fund to start with. Hmmmm?

And, of course, because all those generous banks are going to take big capital hits due the 50% haircuts they promised to take on their Greek debt holdings, they’ll need more Tier 1 capital immediately.

Thank goodness that the leaders announced they were going to make €106 billion available to the top 70 big banks on the Continent to shore up their capital. Only they didn’t say where that money would come from…

Details, details.

It looks to me like they wanted to get a deal done. It doesn’t matter that this is the most incomplete deal they could have possibly put forward – it just matters that today, there is a deal.

The markets should rally on that simple fact.

But, once the deal is discovered to be a raw deal, I suspect there will be selling on the news of the lack of details.

This is FAR from over.

Shah

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Why a Year-End Rally is More than Possible

0 | By Shah Gilani

Lately it seems everyone wants to know one thing: Are stocks going to rally through year-end?

The answer is an unqualified “maybe.”

To explain this uncertainty, let’s look at where the markets are today.

Last week, the Dow Industrials gained 1.4% to end the week at 11,808.79. The S&P 500 rose 1.1% to 1238.25. But the Nasdaq Composite fell 1% to 2637.46.

While it seems like stocks have come a long way in a short time – and they have – in the big picture, we’re still crawling and clawing our way up…

Today the S&P 500 is just 38.25 points above 1200. As a point of reference, the first time the S&P crossed 1200 was almost 13 years ago. The good news (maybe) is that it’s only 20% below its all-time high. And the Dow is just 17% below its all-time high.

However, after hitting 5048 in March 2000, the Nasdaq Composite is still almost 50% below that high-water mark.

It’s the Composite’s lack of traction that worries me.

It tells the story, not just of the tech wreck of 2000, but of technology and growth companies at the margins failing to get any meaningful traction. (And many are marginal indeed. Of the 3,000 companies in the Composite, most are smaller than the average companies in the S&P and Dow.)

Given that, you may find it hard to believe we can get back to old highs on the major industrial indexes.

But it is more than possible.

That’s because so many of the companies in these indexes are “global” in terms of their inputs, sales, and revenues. And thanks (almost exclusively) to global growth, these big companies are momentarily well positioned. Thanks to overseas sales, their earnings have been strong. And when the revenue streams earned globally are translated back into cheaper dollars, currency gains make net profit numbers a lot stronger.

In this sense, actually, the Fed’s quantitative easing programs helped hugely – both by lowering the U.S. dollar’s value and by lowering interest rates. Low rates allowed companies to re-tool their balance sheets by retiring debt and reducing the cost of outstanding obligations.

Regarding this most recent rally, the European picture is what brightened the big-cap world and set the stage for this upward movement. Specifically, it’s optimism that an effective backstop plan to save Europe from imploding continues to drive shorts to cover.

And if any plan put forward is even credible, it would set the stage for an even bigger market rally.

But we’re not there yet…

There has been no resolution, or even any meaningful indication that a lasting program can be put in place to withstand the systemic problems European sovereigns face.

And that is troubling.

Yet it doesn’t seem to be troubling the markets.

We’ve Climbed the European Wall of Worry

Last week, we broke through resistance on the industrial indexes. Volume wasn’t great, but it was better than it has been, given the upward moves.

That we’ve seemingly climbed the European “wall of worry” is something I simply can’t ignore.

In fact, it’s changed my short-term thinking.

I’m still skeptical that any plan to backstop Greece, pre-capitalize European banks, and provide adequate capital to facilitate growth across the European Union will really work.

But fighting the tape at this juncture could be a huge mistake.

If the path of least resistance is higher, I’m going to put aside my analysis and conclusions about Europe, for the time being, and approach putting on trades from the long side.

Miracles happen…

For a genuine rally, we’ll need three things:

  1. A credible European solution (at least for the short run). That would send our big indexes soaring, possibly approaching old highs within a few short quarters.
  2. Some quantitative easing would give us a helpful push. And in fact, Vice-Chairman Janet Yellen said only Friday that QE3 is definitely not off the table.
  3. China to continue to defy naysayers and post strong GDP growth and tamped-down inflationary pressures.

Then we’re looking good.

Of course, playing from the long side can quickly make you sick.

So I recommend using tight stops if you are putting on any new long positions, and then raising your stops if we continue to rally.

Just because I’m putting all my European analysis over to one side of my trading desk, doesn’t mean I’m not watching developments there. I am watching – intensely.

And the moment I see cracks in the cement containment apparatus they’re hoping to construct, you’re going to hear me yell, “SELL!”

For Now, the Numbers Inform the Markets

The major indexes will be working off a host of data points coming out this week.

Tuesday we get consumer confidence; if that number is better than recession numbers in the low to mid 40s, we’ll add that to the “plus” column.

Also important are Wednesday’s durable goods orders (expected consensus is -0.9%) and new home sales (expected consensus is 300k).

But probably the biggest economic news this week will come Thursday morning at 8:30 a.m. That’s when we get the preliminary third-quarter GDP number.

Some estimates are as high as 3.5%, and the consensus number is 2.5%. If we get anywhere between those two numbers I expect a strong positive reaction.

To finish up the week, on Friday we get personal income, September consumption, and October Michigan sentiment.

Bigger than these data points, however, is the fact that Europe’s governments are up against a self-imposed deadline of Wednesday to deliver their much-anticipated “plan.”

Like I said, I’m leaning in from the long side. But I’ll be putting on shorts positions at every meaningful push higher.

In other words, I’ll be averaging up into shorts, because at some point, there will be some profit-taking. And if data and European backsliding signal weakness, I’ll take whatever long profits I have at that juncture and add to all my shorts.

And we’ll go from there…

Shah

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These Three Men Represent Everything That’s Wrong with Wall Street

9 | By Shah Gilani

I’ve already expressed my desire to embrace the Occupy Wall Street movement.

I said last week that I would join in wholeheartedly if I knew exactly what the protesters were trying to achieve.

But I don’t know – and I’m not convinced they do, either.

Still, that doesn’t mean we should dismiss them entirely. After all, there are millions of Americans who sense there’s something terribly wrong with our capitalist system, but they can’t pinpoint exactly what it is either.

But I can.

Bad actors have done bad things to good institutions and our capitalist system. Today, I’m going to let you in on who three of those bad actors are.

You see, part of the problem is that when we think of the “bad guys” on Wall Street, or in Washington for that matter, we don’t often think of specific people. We talk about “them” as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans.

I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they’re using to get away with it.

So, I’m going to start today with three of the biggest perpetrators of the mess we’re in.

The Three Bears

There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are:

  • Robert Rubin, who spent 26 years at Goldman Sachs Group Inc. (NYSE: GS), before becoming Treasury Secretary in the Clinton administration.
  • Lawrence Summers, who came out of the World Bank and was Deputy Secretary of the Treasury under his pal Rubin before becoming Treasury Secretary himself in 1999.
  • And Phil Gramm, once a practicing economist who served as a Republican Senator for Texas from 1985 to 2002.

These are the men who – with help of then-Federal Reserve Chairman Alan Greenspan – interfered with the Commodities and Futures Trading Commission (CFTC), an important regulatory body, to squash any regulation of derivatives.

And now the notoriously murky derivatives market, which was hugely responsible for the 2008 financial crisis, has grown into a $600 trillion trouble spot for the economy.

This group of very influential and powerful men made sure there was no oversight of derivatives products and markets. None.

While that was an incredible gift to Wall Street’s biggest banks and hedge funds, the Three Bears (I call them that because their actions drove us into the systemic economic bear market from which we’re still struggling to emerge) weren’t nearly done.

The Beginning of the End

On April 6, 1998 Citicorp and Travelers Group announced that they would merge into a single company.

But there was a problem.

At the time, such a merger would have violated the Glass Steagall Act. If you’re not familiar with it, the Glass Steagall Act is – or rather was – a piece of Depression-era legislation that established the Federal Deposit Insurance Corp. (FDIC) and mandated the separation of commercial banks, investment banks, and insurance companies. It incorporated other practical and prudent regulations enacted to safeguard investors and the public , as well.

But , lessons learned from the Depression were eventually forgotten – or maybe more precisely, steamrolled by a sweeping deregulatory movement that took root in 1980.

On the day of the announced combination, Traveler’s chairman, Sandy Weill, addressed impediments to the merger in the New York Times, noting that current law would allow the new Citigroup Inc. (NYSE: C) time to divest itself of assets in order to comply with Glass-Steagall.

However, ominously he added: “We are hopeful that over time the legislation will change.”

Just one year later, it did.

The same powerful group of influence-peddling government insiders overturned Glass-Steagall in November 1999, so the illegal merger didn’t have to be reversed. The law that obliterated the prudent separation of FDIC-backed commercial banks and swing-for-the-fences investment banks became known as the Gramm-Leach-Bliley Act.

This act is what paved the way for giant, financial super firms that are so intertwined in the financial markets they’re now all considered “too-big-to-fail.”

An Eerie Epilogue

So what happened to our three players? Were they penalized or held accountable for the undermining of our economy and the implosion of markets? No. They were rewarded.

Robert Rubin went to work for the new Citigroup as a senior adviser of the firm. Rubin made $126 million in cash and stock during his eight years of service, while the bank leveraged itself up by using depositor money. It had to be bailed out in 2008.

Lawrence Summers reportedly took some $20 million from D.E. Shaw & Co., a giant hedge fund that dabbles in derivatives, for a two-year stint doing something nobody at the firm could confirm.

And Phil Gramm, the venerable Texas senator, upon retiring from that powerful position, immediately became vice chairman of the investment bank division of UBS AG (NYSE: UBS).

Yes, UBS – the same Swiss bank that in 2008 had to be backstopped by the Swiss National Bank when its overleveraged and derivatives-laden balance sheet imploded. The same bank that later paid $780 million to settle criminal charges over its conspiracy to defraud the Internal Revenue Service (IRS) and federal government of legitimately owed taxes.

These are the kinds of things that are taking place every day thanks to Wall Street’s influence over our executive and legislative branches of government. And you better believe that average Americans and the Occupy Wall Street protestors can sense that, and they know they should be angry. They just can’t put their finger on why.

I can because I’m a Wall Street guy who spent 30 years working within the system. I studied economics and started my career as a trader on the floor of the Chicago Board of Options Exchange (CBOE). I ran the futures and options division of a giant international money-center bank.

I’ve done everything from trading bonds and mortgage-backed securities to running my own hedge funds. And I have hundreds of stories full of corruption and greed – just like this one.

Not everyone on Wall Street is a bad actor. Most of the professionals working in the capital markets across America are good and honest people. But, there are kingpins and kingmakers whose greed is so disgusting they will sink America for their own fistful of dollars.

It’s time we had better insights into what’s really going on and time to indict some of these bad actors.

Shah

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Dear Occupy Wall Street: Will You Stand with Me?

8 | By Shah Gilani

Dear Occupy Wall Street Demonstrators,

Let me start by saying that I applaud your initiative. Grassroots protests are the essence of democracy. And as we’ve seen with the Tea Party movement and the Arab Spring, nonviolent protests are a powerful way to effect meaningful change.

Yet even though I’m 100% behind you in spirit, I can’t fully support your cause.

Don’t get me wrong, I want to join you. But I can’t – not yet, anyway.

And the reason why I can’t support your ultimate goals is a simple one: I don’t know what they are.

So how about this? I’m going to tell you what I stand for. I’m going to tell you what my goals are. And if you agree, then we can stand together. And i f you agree with me, I won’t wait another minute before joining you whenever and wherever I’m needed.

So here it goes.

The reason I’m already leaning towards your side is that the fountainhead of your disgust seems to be “Wall Street.”

Now, I don’t know what Wall Street means to you. But to me, it means all the crony capitalists and market manipulators whose calculators and spreadsheets say the present value of their self-serving greed is worth discounting all of America’s future.

That’s the Wall Street that I’m committed to fighting – the Wall Street that’s littered with greed and corruption.

But to me, the “Wall Street” we’re fighting against is not synonymous with capitalists. The enemy we share doesn’t include the entrepreneurs and self-starters that have built this country up brick by brick.

So if you think socialism is better than capitalism, you can count me out. If you think that redistributing earned income from hard working Americans to support lazy, self-indulgent, able-bodied crybabies is fair, count me out. If you think that making a lot of money, fairly and honestly, is un-American, count me out. And, if you’re thinking about violence or destroying other people’s property, count me out.

But if you’re mad that Wall Street money has bought our Congress; if you’re mad that there’s an oligarchy of banker puppeteers pulling the strings of the U.S. Federal Reserve; if you’re mad that Wall Street is hell-bent on toying with the stock market and turning the screws on fixed-income investors, parents, and retirees to expand their profit margins; and, if you are mad that “too-big-to-fail” banks can wreck the economy and get bailed out, only to become bigger bullies while tens of millions of Americans lose their homes, jobs, and retirement savings, then I am solidly with you.

And, if you’re with me, we agree that we need to tear down Wall Street to rebuild Main Street!

That’s where we stand, hopefully united.

Now let me offer up a list – a manifesto, if you will – that you may or may not choose to adopt. But remember, I’m not trying to hijack your movement. I just want to offer some vision and clarity.

So these are the goals I’d like for us all, as fed-up Americans, to undertake:

  1. Break up too-big-to-fail banks so they aren’t threatening our financial system .
  2. Investigate failed banks for fraud, and indict and incarcerate guilty parties.
  3. Scale banker bonuses progressively with long-vesting stock options.
  4. Legislate pay claw-back provisions and criminal statutes for bad banker behavior.
  5. Eliminate volatility-inducing high-frequency-trading and ETF program arbitrage.
  6. Make all derivatives exchange traded, highly margined, and transparent.
  7. Limit credit default swaps to two times the value of at-risk underlying credits.
  8. Mandate exhaustive studies of the potential market impact of newly created financial products.
  9. Create simple, effective, light-touch regulations with heavy criminal penalties .
  10. Cap Wall Street’s political contributions and make them transparent.
  11. Audit the Federal Reserve and limit its lending to domestic banking institutions.
  12. Give the Consumer Protection Finance Bureau (CPFB) criminal indictment powers, including over the Federal Reserve.
  13. Make Wall Street answer to the needs of Main Street, not the other way around.

Please don’t get me wrong. It’s not that there aren’t plenty of other things in the United States that need fixing. I think we’d all agree we need to simplify and “fairify” the tax code, if not throw it out altogether. But, your movement is Occupy Wall Street, so let’s stick to that.

There’s one last thing. I’m certain that with thousands of supporters you’ll find a broad spectrum of ideas and beliefs. That we may be united in belief does not necessarily mean we are all alike .

Take me, for example. In some ways, I am a “Wall Street” guy, and in other ways I am one of the 99% you claim to represent. I want an opportunity to make a good living, honestly and fairly. But, like all of you, like all of America, I am sick and tired of the powerful, moneyed oligarchy that runs America profiteering off the backs of hardworking Americans.

That’s why we need strong, transparent, and fair capital markets and honest, smart leaders. The two are not incompatible.

So what I’m saying is that I’m ready to join your revolution, if you’re ready to accept a Wall Street insider who’s determined to restore the system’s integrity – not destroy it.

And that’s why you’re going to hear more from me every week, as I call Wall Street’s biggest players onto the carpet. And I can promise you this: Some of the indictments I make are going to shock you.

Shah Gilani

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Never Be An Outsider Again

0 | By Shah Gilani

Wall Street – it’s the ultimate private money club.

Hedge fund millionaires, traders, politicians, regulators… They’re all shaking hands behind closed doors, scheming together to make yet another buck for themselves – at your expense.

You can’t beat the system, either. Wall Street is the system.

But you can certainly learn how to play it

Indeed, if you have a spy inside the Library of Liars, you can get in ahead of the market-movers. You can ride their moneymaking coattails to the top. And best of all, you’ll never have to be an outsider again.

Welcome to Wall Street Insights & Indictments. Keep reading