Archive for February, 2012

Know the Trend, and You’ll Never Get Killed

21 | By Shah Gilani

Everybody’s got an opinion about the stock market.

That doesn’t make it easy for anyone who listens to anyone else, or worse, listens to everyone else, to get a clear picture about what’s really out there.

Of course, I have an opinion too. And of course, I’m going to tell you what it is.

But first, let me say this about that.

I never start with an opinion. I end up with an opinion, after trying not to have one.

That means I know I don’t know what’s going to happen, so I have to look at what’s really going on. And I get to my opinion by pulling back further and further until I can’t see anything small.

I pull back as far as I can because I want the big picture.

And the big picture is all about the major trend. If you’re on the right side of the major trend, you can’t get killed. You might take a few hits, here and there, but you make money. And while making money is great, it isn’t everything.

There’s something more, something bigger than making money…

It is not losing money, as in, not getting hit so hard that you’re hurting real bad, or that you get killed and are out of the game totally.

That’s never happened to me. I always make money, every year.

It’s not that I don’t have losing trades; I have plenty of those. But I make money because I mostly ride the big trends.

Usually, my losing trades are my more speculative trades, where I try and jump on a smaller counter-trend within the major trend. For example, I see the big trend as positive, so I’m mostly long (I’m buying), but I might think a stock is prone to a sell-off, so I’ll short it. Sometimes that’s a huge winner, but sometimes I will lose on a play that is counter to the trend because the major trend eventually overwhelms everything else.

My point here is this…

The trend is your friend, but within the major trend there can be opportunities riding mini-trends going in the opposite direction. Just don’t get greedy on those plays; the major trend will eventually consume most smaller counter-trending plays.

So, here’s what I see, and here’s my opinion about what I see.

When There’s Money Flowing,
There’s Money to Be Made

The stock market has been on a tear. Which stock market? It almost doesn’t matter. Pick one, any one, in almost any country. Markets everywhere have been on a tear.

But let’s talk specifically about U.S. markets – as in the Dow, the S&P 500, and the Nasdaq Composite.

They’ve certainly been on a tear. The rally since October has been stunning. But it has a somewhat slippery slope feel, in terms of almost being stealth-like, and uninspiring in terms of volume.

We’ve risen so far, so fast, that a lot of investors are shaking their heads and wondering, how the heck did this happen?

So, right now, almost at this very moment, the question is, how did we get here and is this going to last?

My opinion is, yes, this will probably last. The No. 1 reason I think that is because that is the trend, it’s been the trend, and the trend is your friend.

The big picture is all about liquidity. When there’s money flowing, there’s money to be made.

The Fed is keeping interest rates remarkably low and has articulated a low interest rate policy for the foreseeable future. That’s given corporations the ability to retool their balance sheets and do lots of financial engineering. That’s why so many companies are in such good shape right now. That’s a huge positive and not likely to reverse itself any time soon.

Europe was the virus that looked like it was going to make the world sick again. So far, that hasn’t happened. Why hasn’t it? Liquidity, liquidity, and more liquidity.

Just like the Fed pumping money into the U.S. by keeping rates low and by making more and more cash available to banks through its huge quantitative easing moves and “Operation Twist,” the European Central Bank is doing the same thing.

The ECB was buying European sovereign bonds in the secondary markets to try and keep various countries’ interest rates from getting too high. They weren’t that successful. So, in December, they switched gears and lent over 500 banks over 489 billion euros by giving them the money for three years at practically no cost.

They’re going to do another round of that type of term-repo lending on Wednesday. Basically it’s going to be a “come and get it” free-for-all. My guess is the banks will take another 400 billion euros. If they take more than that, it’s because they’re hurting more than we know…

The point is, they’re getting the money so they don’t have to hurt themselves.

China is loosening, too.

Whenever there’s a liquidity party, and a global one at that, and there is no crisis in sight (sure, there’s one in the background, hence the need for the liquidity), then the trend, when it’s up, as it has been since October, should continue.

That’s all I need to know. The trend should continue.

And I’ll continue to mostly play from the long side until the trend changes. Which, of course, it could. But it will take something really major and massively macro to derail this trend.

So, that’s what we look for. We’re on the lookout for an event that could blow up the trend.

A lot of investors are waiting for a pullback because they’ve missed this rally. If we get a correction – and if we do get one it will probably arrive shortly – that’s a good time to not be scared that it’s all over and you’re glad you didn’t buy into this “too far, too fast” rally.

Instead, that’s the time to average down into your good positions. That’s the time to add new positions. If it’s a correction, and the trend continues, you’ll be happy to be in it.

If the correction is a trend-changing event, we’ll know because we’ll see what is causing it. If any correction isn’t caused by a macro trend-changing event, it’s only a correction.

By the way, the Investors Intelligence survey says that 22% of newsletter writers expect a correction, 51% are bullish, and 27% are heavily into the bear camp. All that’s actually bullish for the market.

Right now, the S&P 500 is at 1365.74. Last April, on the 29th, it got to 1363 before falling through early October 2011. It’s up 24.25% since those October lows. If it breaks out higher from here, that’s a very bullish indicator. Heck, it might be on its way to its old record high of 1565.15, which it touched on October 9, 2007.

Dow 13,000? I think it’s here. We’ll see shortly, maybe shortly after we get a correction, if we get one.

And did you see the Nasdaq Composite at 2963.75? That’s its highest close since December 11, 2000.

Global markets have been rallying based on the U.S. economic bounce and our market jumping higher. And the world has the ECB to thank for its open money spigot and staving off a European banking meltdown.

Starting in July, the European Stability Mechanism will essentially layer up to 1.4 trillion to 2 trillion euros into the banking system to help banks finance almost 1.5 trillion euros of bank debt coming due this year. The ECB’s earlier funding and Wednesday’s upcoming round is to offset the 210 billion euros coming due in the first quarter.

Again, there’s trouble out there… but as long as the liquidity spigots are wide open, the trouble should be contained.

Yes, it’s a game of expend and pretend. But if you “fade” it, you already missed this rally, and you could miss the next leg up, too.

As I said, when there’s money flowing, there’s money to be made. And here’s how.

We’re Not Out of the Woods Yet

Greek bondholders had to take a 53.5% write-down, which they say they will do. We’ll see.

Greece will make its 14.5-billion euro payment to creditors on March 20. But its
GDP is expected to fall 4.3% in 2012, which was just lowered from the previously estimated 2.8% hole it was assumed to be digging for itself.

Greek 10-year bonds rose, after last week’s agreement, to 32%. That’s not exactly a vote of confidence in the whole process being successful.

Portugal’s bonds fell, too, increasing the yield from 11.81% to 12.07% on their 10-year paper. Reforms there are being implemented to yield mandated austerity and higher taxes after they got a 78-billion euro bailout based on their promises to fix their own house up. But Portugal’s GDP is forecast to shrink 3.3% in 2012, and even that might be too rosy a picture.

European markets have been on a tear. But Europe isn’t out of the woods. If Europe sinks into a steep recession, we would likely see the trend stop in its tracks and maybe even reverse itself.

Oil prices are another potential trend-stopper. We’ll have to keep an eye on them.

In the meantime, are you long oil stocks? Why not? That trend is up. And until it reverses, it’s worth a play. Just make sure you have your stops in because oil could reverse at any moment. Still, it’s a worthwhile play. I like ConocoPhillips (NYSE:COP), and I especially like its dividend (a 3.50% yield right now).

In my newsletter subscription services – Capital Wave Forecast and The Spin Trader – I’ve been playing from the long side and adding smart, conservative positions. We took some small dollar losses when I put on some counter-trending trades, which just got sucked up by the major trend.

But we’re in rally mode, and I expect we’ll stay here.

All that being said, a correction could be imminent. I and we (my subscribers) will be adding to core positions, averaging down. And we have our stops in place on the positions that we want to exit if the correction is steep.

And if we get a correction and it isn’t just a correction, you’ll know. Why? How? Because I’ll tell you (you’ll know yourself) what’s causing the trend change.

The neat thing is, that after 30 years of playing the markets, I know what I don’t know, which is a whole lot. And I know that if you know the trend, you’ll never get killed, and you will make money every year.


Dodd-Frank Isn’t Legislation; It’s a Comedy

73 | By Shah Gilani

In last week’s Insights & Indictments, in my commentary on all the letters sent to the SEC about the proposed Volcker Rule, I not-so-casually commented that the Volcker Rule “shouldn’t exist at all.”

And then I called the parents of the Volcker Rule, the Dodd-Frank Act, a “joke.”

Well, by the amount of comments I got back from I&I readers – right now, there are about 95,000 of you (and counting) – you’d think I was talking about something really controversial, like contraception, for heaven’s sake.

Talk about passionate!

I understand that people get passionate about contraception. After all, without all that passion, we wouldn’t need contraception.

But me being passionate about the birth of the Volcker Rule, which I said should never had been conceived, apparently caused a lot of you to think I crossed some moral line.

Not me! I’m not one to ever say anything controversial! And I’m certainly not the kind of guy to wade into the contraception debate.

But, if I was, I’d be a strong advocate for it.

The unwelcome birth of the Volcker Rule is a good example…

If the inflamed passion of those two preening peacocks, Chris Dodd and Barney Frank, was sheathed before their love of public attention (and private whoring to special interests) forced them into the “Act” (I’m talking about the Dodd-Frank Act; get your mind out of the gutter), then we wouldn’t have this the bastard-child whose future we are debating.

Actually, though, it’s not that we have the Volcker Rule that’s an issue. It’s the affair between its parents that’s the issue.

There was no happy marriage in Dodd-Frank. It was always a sham.

The Act itself isn’t a marriage certificate, proving a passionate love for the public interest over private banking and financial services.

It’s nothing less than a living will pre-nup that guarantees infidelity everywhere between the sheets it’s dirtied in its making.

By “sheets,” I mean sheets of paper. Dodd-Frank is 848 pages long.

By comparison, it is 23 times longer than the 37-page Glass-Steagall Act, the sensible 1930s legislation that separated deposit-insured commercial banks from risk-taking investment banks and was aborted by Congress in 1999.

Don’t get me started on that…!

All I’ll say is that Dodd-Frank is really an attempt to put Humpty Dumpty (Glass-Steagall) back together again, with the biggest pieces missing.

Just How Ridiculous is Dodd-Frank?

It’s not legislation. It’s not a passion play. It’s a comedy.

It mandates 87 “studies,” of which only 37 have been “completed.”

I just read in The Economist that, according to super-powerhouse law firm Davis Polk (believe me, they are good!), “only 93 of the 400 rulemaking requirements mandated by Dodd-Frank have been finalized.”

If you don’t understand the significance of enacted legislation that isn’t yet written, the Volcker Rule is a perfect example.

The Volcker Rule is a part of Dud-Frankenstein (I mean Dodd Frank, or D-F, as in…). And it, alone, is some 298 pages (or dirty “sheets”) long.

It was written by four of the five agencies charged with writing and enacting it. The fifth agency, the CFTC, wrote its own 489-page proposal on what should be in the Volcker Rule.

Good thing all our regulatory agencies all work together, right? Good thing they don’t all have their own fiefdoms and competing political agendas, right?

Anyway, Davis Polk says that the Volcker Rule includes 383 questions that themselves result in 1,420 sub-questions. The firm has created an interactive Volcker “rule map” that, according to the magazine, it produced for its clients – as well as 355 “distinct steps” for them to follow.

So, I ask you, this bad marriage, this sham affair, this monster Dud-Frankenstein that birthed the Volcker Rule, or son-of-DF…

Is this any way to legislate?

The Whole Exercise is Another Form of “Extend and Pretend”

Last week, when commenting on the Volcker Rule, I called President Obama “spineless.”

A lot of you didn’t like that either. (Of course, some of you loved it.)

What I was pointing to was that the President came into power with an OVERWHELMING American mandate (and a global mandate, for that matter) to clean up Wall Street and to protect us from what had just happened, ever happening again.

So did he take immediate action upon entering office? No.

Instead of striking while the iron was hot, the President pandered to Wall Street special interests (after all, he had accepted tens of millions of dollars from them in election funds) by pretending to attack banks and bankers, all the while extending the day of reckoning and the writing (if you can call it that) of any legislation to stomp out Wall Street abuses.

And lo and behold, we got Dodd-Frank.

We got shafted.

So today we get to pretend that laws were written (most were not, and never will be, and the ones that are written, like the Volcker Rule, well, you see what’s happening there), while banksters get to extend the time it takes to enact anything meaningful just long enough to get markets to reach new highs and the focus of discussion shifts from what Wall Street hath wrought, to contraception.

So go ahead, get mad at me for bringing up contraception. After all, can’t you see that I’m just trying to divert the conversation?


P.S. At overwhelming request from you guys, we’re now going to have “share” buttons attached to every I&I article. You can find them along the left side of each article on the website, or at the bottom of each email. Whether it’s email, Facebook, Twitter, or anything else, I encourage you to “share” to your heart’s content.

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The Truth About Greece’s Fate

1 | By Shah Gilani

Something bad has to happen. Why? Because things just look too darn good…

Last year was one of the wackiest and definitely one of the most volatile years in the history of stock markets.

For a good part of the year, all eyes were on Greece, that slippery sibling of the 17 Sisters currency family. The country

  1. was going to default;
  2. wasn’t going to default;
  3. was going to be let go by the Union;
  4. was going to go on its own;
  5. was hauled back into the E.U. boat;
  6. begged and clawed to get back into German good graces, even as its citizens gave the Teutonic Tamers the collective finger along with other E.U. (as in “everything yours is ours”) creditors who wanted Greeks to slide their airport and maybe some stone-walled vestiges of the world’s first democracy into a collateral pool to back promises of repayment.

The fate of the free world, and China too, was held hostage to contagion fears – that a Greek tragedy would infect global banks, and that the Great Recession would start to look like a fond memory.

But then, something miraculous happened. Christmas came early for miserly bankers.

Only a few days before Santa started packing his own sled, the ECB one-upped him. In one day, the ECB dumped $639 billion USD down the chimneys of 523 shivering European banks.

As the Brits say, “Brilliant!” That deft move was more than kindling for global markets.

But, while contagion fears have been greatly tempered, Greece still hangs in the balance.

Like the ill-fated Costa Concordia – that oversized cruise ship that ran aground last month off the coast of Italy – Greece looks to be listing… and hope and prospects for economic growth may be without a lifeboat, but she hasn’t sunk over the ledge that she rests on.

So is she eventually going to slip over the edge and out of sight? Yes.

Here’s what’s really happening…

It’s Just Another Game of “Extend and Pretend”

You know those severe fiscal austerity measures being forced on Greece to get the bailout it needs to stay afloat?

Well, it’s a lot like the need to pump the 2,380 tonnes of fuel out of the distressed Costa Concordia.

Once all future economic fuel is removed from Greece, like it will be removed from the listing Concordia, then they will both be light enough to be shifted just enough to tip over the precarious ledge they both rest on.

The ECB knows full well that Greece will default. It has to. And it will.

So why all the fuss?

This is just another game of “extend and pretend,” in case you’re not a gamer and didn’t see this for what it really is.

The ECB, with initial (and massive) help from the Fed (who offered up early “stocking stuffers” in the form of unlimited dollar swaps to all central bank comers) has been buying as much time as it can, all the while pretending that Greece was going to be supported by its E.U. currency cronies, and not default, and not trigger the dreaded contagion.

And it’s working – the “extend” part, that is. Markets have reacted beautifully to additional liquidity measures (meaning massive direct injections of pure cash into European banks).

Contagion fears have abated.

To top off the “extend” tank, even China has chimed in (off-the-record, of course) by indicating, in not so many words, that if Greece takes the necessary austerity measures the Chinese want to see (so the Chinese aren’t throwing money into a profligate sinkhole), it will pony up a chunk of change for the EFSF. That’s been more fuel for markets.

The extend game is also all about giving economies time to revive themselves.

The U.S. is case number one. So far, so good. There are signs of green shoots here, and American banks have been given time to build reserves, courtesy of the Fed’s endless zero interest rate policies.

All we need is time.

Then, at some point, the “pretend” part will end… and Greece will default.

There is No Other Option for Greece

It can’t grow, under these Herculean austerity measures being imposed on it. There is no sun for it to grow under the umbrella of a strong euro, which will strengthen once Europe starts growing again.

So Greece will follow Iceland.

It will say: “To hell with all of you, we’ll take our own medicine and lift ourselves up by our own bootstraps.”

It will issue its own currency. Everything will be cheap in Greece. And tourism, its economic mainstay, will explode.

Personally, I’ve always wanted to go to Greece and cruise the islands. When Greece is suddenly half-price, I’m going to rent a sailboat, a big one, and live there cheaply for a whole summer. No doubt I’ll see you there, too.

The ECB, in its infinite wisdom, has already covered its own you-know-what in anticipation of Greece’s default.

It came out last week and swapped its 50 billion euros of Greek debt for new debt from Greece, with the same face amount. Why? Because the new debt won’t be subject to “collective-clause” agreements about to be imposed on “private” creditors. (Wait until you see this mess!)

Right now everything is looking amazingly positive. Markets, in particular, are exceptionally strong. I expect to see them remain so.

That is… until Greece does a Concordia rollover. Then, as the tide goes out, we’ll really see, as Warren Buffett famously said, “Who has been swimming without a bathing suit.”

We better hope the “extend” game has been put to good use by banks. Otherwise that little contagion thing that everyone feared last year, well… it will make us wish it was last year.

Why the Volcker Rule is a Cop-Out and a Joke

0 | By Shah Gilani

Right now everyone’s talking about the Volcker Rule.

For heaven’s sake! What’s the big deal? After all is said and done, there is only one real problem with it (and I’ll get to that in a minute)…

The 300-page draft Rule, named after its champion architect, former Federal Reserve chairman and inflation-fighting icon Paul A. Volcker, is an addition to the ever-evolving masterpiece of legislation (yes, I’m being sarcastic) known as the Dodd-Frank Act.

Now, draft SEC rulemaking and regulatory actions are first submitted to the public for “comment.” The SEC collects all comment letters and posts them on their website. (Check out “How to Search for EDGAR Correspondence.”)

Well, wouldn’t you know it, this draft (some might call it “daft”) Volcker Rule has caused a flurry of letter writing; letters were due to the SEC by no later than this past Monday evening.

All in all, this august (not the month) regulatory body received 241 detailed comment letters (that’s a lot of comment letters) and an astounding 14,479 mostly form letters, as well.

Almost all of the form letters to the SEC, many of which were “personalized” by submitters, were strongly in favor of the Volcker Rule and called for strengthening it and not watering it down by allowing any exemptions.

How do I know that? (No, I didn’t read them all.) They resulted from an e-alert campaign to activist supporters of the Americans for Financial Reform group and Public Citizens, who posted appeals on their websites.

Other notable comments in favor of the Rule, and weighing-in in more detail, came from Paul Volcker himself and Senators Carl Levin (D-MI) and Jeff Merkley (D-OR), who championed the Volcker Rule in the Dodd-Frank legislation and in their comments called the draft too “tepid.”

The lengthiest comment letter in favor of the Rule (and of tightening it significantly) came in the form of a 325-page love letter from the Occupy Wall Street movement. That one is well worth a read (posted here, if you’re interested).

However, of those 241 detailed comment letters, most of them came from detractors.

Detractors like individual banks (who normally let their dogs and lobbyists do their biting) and industry groups, such as the Securities Industry and Financial Markets Association (Sifma) and the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

Powerhouse law firm Davis Polk was itself drafted by several banks and Sifma to help draft at least 10 letters on behalf of the cause (“cause” banks want to keep making big bonuses).

Detractors of the Rule warned of dire consequences for American capital markets, American corporations, the American economy, the world, and the universe beyond even our own little constellation, if the Rule is allowed to curtail their most coveted and conscientious shepherding of their clients’ best interests.

Prop Trading and Market Making

The Volcker Rule comes down to this: It stops banks and any other financial institutions that are backstopped by the Fed or the FDIC, generally speaking, taxpayers, from betting on their own behalf.

That’s what proprietary (or “prop”) trading is: betting the house’s money to make outsized gains to enrich the homeboys who are pulling leveraged levers for fun and profit.

There are innumerable arguments against innumerable issues inherent in the lengthy and unwieldy draft Rule.

Yet the biggest issue is what banks will be allowed to do in the “market-making” realm.

Market-making is when a dealer takes a position in anticipation of a customer order, or on behalf of a customer who wants to “work” a position, or any number of other iterations (and there are hundreds) of the market-making functions that dealers perform.

I’m not going to bore you with the realities of market-making, although I am intimately familiar with almost all of them, having been a market-maker on the floor on an exchange, being a registered over-the-counter market-maker, and generally making markets for customers and myself in many different instruments over many years on Wall Street.

Trust me. (Don’t you love it when people say that?)

Market-making involves taking risks.

By its very nature it can, and more often than not does, involve prop trading. So there you go – market-making is prop trading.

There is a lot to comment on regarding the Volcker Rule.

But, the bottom line truth is, for all its good intentions and unintended consequences and all the fear-mongering and vehement griping about the Rule destroying American capitalism and the power of American banks to compete on the world stage, there is only one real problem with the Volcker Rule.

It shouldn’t exist at all.

Why We’re Talking about Volcker in the First Place

The only reason we have to have a Volcker Rule is that our spineless President and his administration – replete with Wall Street holdovers who helped sell America’s soul to the oligopoly of bankers that buy presidents and congressmen and women – didn’t resurrect the Glass-Steagall Act that formerly separated commercial deposit-taking institutions from investment banks who were free to gamble their own (partners, investors, and willing shareholders) capital to their hearts content, because taxpayers were protected.

Glass-Steagall proved itself for more than 40 years.

It was dismembered by a powerful partnership of bankers and politicians to make way for giant “universal” banks that ultimately paved the way for privatized profits and socialized losses.

The problem with the Volcker Rule is that it’s a cop-out.

It’s a travesty of a mockery of a sham that we once had prudent and protective regulations, and that they were eviscerated (where they weren’t eradicated altogether).

Dodd-Frank is a joke.

It’s all about reconstituting most of the regulations that got axed to death under deregulatory regimes championed by Administrations and aiding and abetting Congresses.

Okay, one last note on the subject…

The Volcker Rule will end up being watered down, and then won’t be enforced, and will eventually be overruled – that is, if it isn’t delayed enough (that’s the plan, by the way; that’s why so many industry groups sent in so many long comment letters) so that a new administration this fall has a chance, and Dodd-Frank has no chance.

This would all be kinda funny, if it wasn’t so sickening.


The Real “Third Rail” in American Politics

5 | By Shah Gilani

A third rail sometimes runs alongside (or between) the twin rails of a train track to provide electric power to the train.

You don’t want to step on these high-voltage rails, unless you’re game for the shock of your life, or death, as the case may be.

In politics, the “third rail” is a metaphor for an issue that’s “charged” enough that, by supporting it, you risk derailing your career.

Me, personally, I get a real charge out of political discussions, especially contentious issues.

But there’s one “third rail” in politics that no-one ever seems to want to talk about.

And I don’t understand why.

It’s not even charged. In fact, it’s more of a non-starter for most people. They don’t get electrified by it; they get indignant, as if you’re stupid if you even bring it up.

Okay, call me stupid…

To me the real “third rail” in American politics is that there is no real third party, or fourth or fifth party, for that matter.

There’s nothing in the Constitution about parties or the need for a two-party system.

There’s nothing in any of the Founding Fathers’ personal or public papers, or anything anywhere on any Revolutionary battlefield, or in the dispatches from Constitutional conventions, or ratification assemblies, or anywhere in our history that even suggests or hints at a two-party system.

In fact, in Alexander Hamilton, James Madison, and Jon Jay’s Federalist Paper No. 10, we are warned that: “A zeal for different opinions concerning religion, concerning government, and many other points, as well of speculation as of practice; an attachment to different leaders ambitiously contending for pre-eminence and power; or to persons of other descriptions whose fortunes have been interesting to the human passions, have, in turn, divided mankind into parties, inflamed them with mutual animosity, and rendered them much more disposed to vex and oppress each other than to co-operate for their common good.”

The problem with a two-party system is that both parties are opposition parties all the time. There’s no room for compromise. There’s no middle ground.

This is where we are in America today.

We don’t have the fruits and balance of a divided government. We are a nation divided by two warring parties.

Federalist Paper No. 10 also warned us that:

“Enlightened statesmen will not always be at the helm. Nor, in many cases, can such an adjustment be made at all without taking into view indirect and remote considerations, which will rarely prevail over the immediate interest which one party may find in disregarding the rights of another or the good of the whole. Complaints are everywhere heard from our most considerate and virtuous citizens, equally the friends of public and private faith, and of public and personal liberty, that our governments are too unstable, that the public good is disregarded in the conflicts of rival parties, and that measures are too often decided, not according to the rules of justice and the rights of the minor party, but by the superior force of an interested and overbearing majority.”

My message today is this: Our two-party system isn’t working. It’s too divisive. It’s turned us into a nation of two opposing sides, when there aren’t just two issues we face – there are thousands.

It’s high time we send a clear message to the Republicans and Democrats that they don’t speak for all of us, and more often these days, they don’t even speak for most of us.

We need a third party to electrify the electorate.

Personally, I’m hoping Ron Paul steps out of the two-party system and becomes a third-party candidate. And I hope Ross Perot backs him.

Paul is different.

And America needs to be on a different track.


Signs of Life (and Death)

0 | By Shah Gilani

The dual question I’m getting asked a lot these days is, “Have stock markets gotten ahead of themselves?” And “Is too late to get in?”

My answer – hold on, let me dust off my crystal ball – is…

Yes, they have.

And no, it’s not too late.

Markets here and (especially) in Europe look like they have gotten ahead of themselves. But the surest way I know to lose money in the stock market is by fighting (or “fading,” in Wall Street parlance) the trend.

Bad things can always happen. We know there are black swans out there. But stock markets have been climbing the proverbial “wall of worry,” and most of them look surprisingly resilient.

So what to do? Personally, I’m having my subscribers add to our positions.

The trend is always our friend. Yet I’m ever mindful of thinly trading (low volume) markets turning on a dime.

But waiting for a correction to get in now could be hazardous to your longer-term health.

That doesn’t mean I don’t think we are going to see some profit-taking some time soon. I believe we will. But, as long as the trend remains intact, in spite of markets looking like they’ve gotten ahead of themselves (they are technically “overbought”), I’m more comfortable being long, and adding to positions, than I am trying to pick a near-term top.

However, because we’ve come so far, so fast, now is not the time to jump all in.

It is a good time to make sure you have a plan to add to strong positions that have shown good momentum if we get a correction.

That’s what we’ll be doing… that is, unless there’s a trend change.

Oh, and Speaking of a “Trend Change”…

Congress has been trending towards putting an end to their little “side business” of insider trading.

Senate and House bills are moving forward; but there’s a fly in the ointment. And it’s not just one of those annoying House flies (as in House of Representatives), either.

Although the guy I’m talking about is a House fly, he’s more like one of those green flies that bites the you-know-what out of you.

The only thing that keeps me from going crazy when green flies are out and biting is knowing that, if I’m patient enough to wait for them to land on me and let them start biting, I can usually manage to swat the you-know-what out of them.

That’s just what I’d like to do to GOP Rep. Eric Cantor.

While the Senate passed their version of the Stop Trading on Congressional Knowledge Act (seriously, don’t you just want to swat the you-know-what out of all of them? Check out the name of this bill. It’s as if they’re addressing some other “Congress” – anyone other than themselves) – otherwise known as the STOCK Act (so clever) – good old insider boy Rep. Cantor was taking some of the “sting” out of the House’s version of the bill.

Here’s what has me seething.

It’s not that he plans to bring his version of the STOCK Act to the floor of the GOP-controlled chamber today using a procedure that prevents other lawmakers from voting on amendments to it – though that’s annoying.

It’s that he cut a major provision (there’s your “trend change,” if you were wondering how I was going to fit that in) from the House bill that required the little people who quietly go about mining Washington’s hallways and congressmen’s offices looking for market-moving inside information to disclose their activities, the same way lobbyists are supposed to do under the proposed law.

According to Rep. House Fly Cantor, that provision is just not fair to Wall Street and the maggots who operate what’s become known as the “political-intelligence” industry,.

Did you get that?

Cantor is taking out a provision that makes it illegal for Wall Street flies to adhere to the halls and walls of Washington to pick up inside information that they can trade on.


… Are you sick yet?

I could go on a rant here, but what I have to say would never be as perfect and succinct as what Rep. Louise Slaughter, the House Democrat who has been pushing the STOCK Act for six long years, had to say about Green Fly Cantor pandering to his Wall Street masters.

According to this morning’s Wall Street Journal, she said that the Cantor-backed version was crafted “in secret, behind closed doors, brokering deals for special interests.”

And her killer quote of the year: “How ironic – insiders now appear to be writing a bill meant to ban insider trading.”

You just can’t make this stuff up. But you can swat the you-know-what out of them.


Special Q&A Edition

0 | By Shah Gilani

Since we launched Insights & Indictments a few months back, I’ve been overwhelmed by the reader response.

I want to thank you for that. The feedback I get from all of you – good, bad, or neutral – is tremendously valuable. It’s a big part of the process for me. I need to know when you “get” what I’m throwing out there… and, even more importantly, when you think I’m dead wrong.

That’s why, from now on, I’ll be dedicating the first Tuesday of each month to a Q&A column.

I encourage you to share your own comments and questions. Just send them to

Of course, I have to say right up front that I can’t give any personalized investment advice. But I can and will try to address them in future columns.

Let’s dig right in…

Q: I would not put Alan Greenspan in the article [“Posted in Q&A

Here’s What’s Wrong with America

6 | By Shah Gilani

So you really want to know what’s wrong with America?

Okay, I’ll tell you.

But you have to do me two favors.

First, I respectfully request that you put aside any preconceived notions you might have about my agenda.

I’ll tell you right up front. My agenda is to get Americans to stop thinking the way they’ve been tricked into thinking.

You see, I used to have an ideology and strong political leanings.

Now my ideology conforms to the real world, as opposed to the tyranny of magical thinking, and my political leanings shift against the ill winds of stale rhetoric. In other words, I am a realist.

Second (and this is a huge favor), as you read this, pretend you don’t have any ideology, any political leanings, or any opinions.

Okay, ready? Here it is.

What’s wrong with America is that too many Americans don’t think for themselves anymore.

Not that it’s their fault. Most of us have been deluded. Not brainwashed… more like lobotomized.

We’ve been lied to, again and again and again. Lied to by self-righteous poseur Americans who want to divide us into believers and nonbelievers, free market capitalists and socialists, Republicans and Democrats, red states and blue states; because either you’re an American or you’re un-American.

They put it to you like this: You’re either with “us” or against us.

Who are these ugly Americans that are lying to us and dividing us, and why are they doing it?

They are our leaders (and our would-be leaders). They are our legislators.

We have ceded the American spirit of democracy and free thinking to the government we created, and to sycophant wannabe politicians who pander to the partisan corners they push us into. We have become their pawns.

Why do they do it? For the power – the power to make money, lots and lots of money.

Why do we do it? We are fools and believe them. We don’t believe in them, but too many of us believe what they want us to believe they stand for.

And that is the problem.

They don’t stand for what you think they stand for. What’s worse is, that means some of you may not stand for what you think you stand for.

We’ve been thrown.

Politicians are jujitsu masters, flipping their positions as they shake our hands and flip us on our backs, until we don’t know which way is up and who stands for what.

That’s how they like us – dazed and confused, and all riled-up and ready to kill each other for what we stand for, for their agendas, not ours.

Okay, now, here’s where I’m going to need you to drop any ideology or political leanings you might have.

Let me show you how we’ve been flipped around by the jujitsu moves of both Democrats and Republicans, and why it’s hard for anyone to think clearly on their own.

Almost 30 years of “conservative ascendancy” from Ronald Reagan to George W. Bush got us to where we are today. (Stop right there. If you’re thinking I’m going to bash Republicans and you’re getting defensive, or you’re thinking I’m going to bash Republicans and you’re hoping I go on the offensive… you’re wrong.)

It is what it is.

“Free Market” deregulatory zeal stripped prudent regulations from the books of law that governed our history of capitalism.

I say “our history” because our particular regulations and laws only came into being in reaction to fraud and manipulation that exposed the darker side of self-aggrandizement in our system of free market capitalism.

It is what it is.

But here’s the first “I got you,” “No, I’ve got you,” political jujitsu move.

A free-for-all bacchanal, replete with financial whores, ravaged the American economy by leveraging the largest field-bet ever: the American Dream, home ownership.

Everyone gorged themselves. There were no innocents.

And when we realized how the “system” we coveted had run amok, which we were all mostly responsible for, we cut short the ascendency of greed and voted “for change.”

To be fair, I was a fool smitten with the notion that real change was possible, and I backed it.

Flip number one (in this jujitsu jamboree) was that, immediately upon the ascendancy of Barack Obama, Democrats started to act like Republicans by kow-towing to banks and big business.

Talk about change…

The truth about “change” in the Democratic Party is that Democrats have now gotten rich playing the game, and they kind of like that change in their fortunes.

The dilemma for Democrat leadership is how can they be the party for the people if they are no longer of the people? Well, as they say in Brooklyn, fugghetaboutit! Follow the money.

How else can anyone explain why a president with a worldwide mandate to fix the incredulously large hole in American financial services – which bled the entire (new) Old World like some leech-sucking medieval prescription – would choose to champion healthcare instead of immediately triaging the patient in intensive care?

The Republicans, for their part, want us to believe that utopian capitalism was mowed- down in its adolescence, and if we only double-down now, the Holy Trinity of deregulation, limited government, and free markets will make the rich richer and the poor less poor.

It’s all about jobs, jobs, jobs, and jujitsu.

How else can Tea Party neophytes, waving the banner of conservative Republicanism, rail against bailouts, when their deregulated institutions buggered free markets, and cry rape even before new rules (which are nothing more than the old rules rewritten) deflower their moneymaking schemes?

How else could liberal Democrats have embraced Wall Street salesmen like Larry Summers, Ben Bernanke, and Tim Geithner in a “group hug” of change America can believe in?

Because… in this flipped-around world, the right becomes the left, and the left becomes the right.

And we’re left on our backs trying to figure out which end is up.

It’s about the synergy of profits and politics. It’s about the money, stupid.

It’s about us not realizing that politicians get rich by dividing us.

Absolutism is the only sure road to all or nothing. And there is no “all.”

If you and I want to fix what’s wrong with America, we can start by not being resolute about any politician’s 100% all-or-nothing prescription for what ails us. We need to demand that our rhetoric-spewing so-called leaders compromise to build workable bridges across the divide that separates us from getting back to being America.

And if we can stop believing in our own self-righteous blind faith, maybe we can see for ourselves how we are part of the problem.

You’re either with me or you’re not… (That’s a joke!)



Bankers Committed Fraud to Get Bigger Bonuses

5 | By Shah Gilani

In case you didn’t catch the article titled “Guilty Pleas Hit the ‘Mark'” in yesterday’s Wall Street Journal, I’m here to make sure you don’t miss it.

This is too good.

Three former employees of Credit Suisse Group AG (NYSE:CS) were charged with conspiracy to falsify books and records and wire fraud. They were accused of mismarking prices on bonds in their trading books by soliciting trumped-up prices for their withering securities from friends in the business.

By posting higher “marks” for their bonds in late 2007, they earned big year-end bonuses.

What a shock!

What’s not a shock is that, after a bang-up 2007, Credit Suisse had to take a $2.85 billion write-down in the first quarter of 2008. No one knows how much of that loss was attributable to the three co-conspirators, who were fired over their “wrongdoing.”

Two of the three accused pleaded guilty. Also not shocking is the reason David Higgs – one who pleaded guilty – gave for his actions. He said he did it “to remain in good favor” with bosses, who determined his bonus, and who profited handsomely themselves from his profitable trading and inventory marks.

As for Salmaan Siddiqui, the other trader who pleaded guilty? His attorney Ira Sorkin, the former SEC enforcement chief, said of his client, “What he did was the result of his boss and his boss’ boss directing him to do it.”

You know what else is shocking?

Everyone was dong this at all the brokerages, investment banks and commercial banks that had trading desks… and only three people have been charged.

What’s even more shocking (though not to me) is that the “system” has been engineered over years to allow banks to hold riskier and riskier securities, with more and more leverage, and, in the most egregious affront to sense and safety, be allowed to mark their inventories (including exotic instruments that no one really knew how to price) based on internal “models” and extrapolated scenarios. Whatever that means.

Everyone up the chain, from the trader making bets to his boss, his boss’ boss, all the way up to the chairman, eats off the same plate.

And you know what they say about where you eat…

Marking your trading book within the bounds of what you can get away with isn’t exactly condoned, but neither is it frowned upon – especially at year-end, when bonuses are being calculated. After all, you’ll always have next year to trade out of losses or turn them into winners.

It’s about getting paid and how much.

But don’t just blame the traders and their bosses. Blame the politicians and the regulators who tore up sound Depression-era banking laws and coddled big banks by “desupervising” them when deregulation didn’t deliver the whole train to the station.

Find out where the mortgage-backed securities boom really started, who greased some of the steepest slopes, and why and how everything leads back to bonuses.

How Deregulation Ended Honesty in the Banking Sector

Here’s what happened, in broad strokes (borrowed from articles I’ve written for

In 1988, the Basel Accord established international risk-based capital requirements for deposit-taking commercial banks. In a byproduct of the calculations of what constituted mortgage-related risk (traditional mortgage loans have long maturities and are illiquid), lenders were expected to set aside substantial reserves; however, “marketable securities” that could theoretically be sold easily would not require much in the way of reserves.

To free up reserves for more productive pursuits, banks made a wholesale shift from originating and holding mortgages to packaging them and holding mortgage assets in a securitized form.

That lessened asset-quality considerations and ushered in the new era of asset-liquidity considerations.

Meanwhile, over at the U.S. Commodities Futures Trading Commission (CFTC), the appointment of free-market disciple Wendy Gramm (wife of then-U.S. Sen. Phil Gramm (R-Tex.)) as chairman would result in her successful 1989 and 1993 exemption of swaps and derivatives from all regulation.

These actions would turn out to be consequential in the reign of terror that was to come…

In 1993, with her agenda accomplished, Wendy Gramm resigned from her CFTC post to take a seat on the Enron Corp. board as a member of its audit committee. We all know what happened there. (Wait a minute; I did say she was on the audit committee, right?)

Of course, Enron’s fraud and implosion became the poster child for deregulation run amok.

It ultimately helped spawn Sarbanes-Oxley legislation, which has its own issues, but nonetheless has prevented all kinds of fraud and inappropriate behavior on account of the fact that top executives have to attest to the veracity of, and sign off on, all financial documents and other “stuff.”

Now, don’t lose any sleep over the fact that of all the CEOs and CFOs and other muckety-muck multi-multi-millionaire executives that ran and still run the too-big-to-fail banks and the banks and investment banks that did fail or were merged (because they failed but were valuable to banks who wanted to make themselves bigger so they would never be allowed to fail) ever were charged with any crime under Sarbanes-Oxley.

Why shouldn’t you worry? Because, silly, there’s a concerted effort to do away with the law. After all, don’t you know, it hampers business from creating jobs, which we desperately need?

Hold on.

Sorry. I just returned from the bathroom, where I was getting sick.

Anyway, the constant flow of money to lobbyists and into legislators’ campaign coffers was paying off for banking interests.

The Fed, under Chairman Greenspan, along with Robert Rubin and Larry Summers, was methodically deconstructing the foundation of the Depression-era Glass-Steagall Act.

The final breaching of the wall occurred in 1998, when Citibank was bought by Travelers.

The deal married Citibank, a commercial bank, with Travelers’ Solomon, Smith Barney investment bank, and the Travelers insurance business.

There was only one problem: The deal was clearly illegal in light of Glass-Steagall and the Bank Holding Company Act of 1956. However, a legal loophole in the 1956 BHC Act gave the new Citicorp a five-year window to change the landscape, or the deal would have to be unwound.

Phil Gramm – the fire breathing free-marketer, Texas senator, and then-chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs (and loving husband of Wendy) – rode to the rescue, propelled by a sea of more than $300 million in lobbying and campaign contributions.

In 1999, in the ultimate proof that money is power, U.S. President Bill Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act, at once doing away with Glass-Steagall and the 1956 BHC Act, and crowning Citigroup Inc. (NYSE:C) as the new “King of the Hill.”

From his position of power, Sen. Gramm consistently leveraged his Ph.D. in economics and free-market ideology to espouse the virtues of subprime lending, where he famously once stated: “I look at subprime lending and I see the American Dream in action.”

If helping struggling borrowers pursue their homeownership dreams was such a noble cause, it might have been incumbent upon the senator to not block legislation advocating the curtailment of predatory lending practices.

Oh well. Let’s not quibble with a Senator.

From 1989 through 2002, federal records show that Sen. Gramm was the top recipient of contributions from commercial banks and among the top five recipients of campaign contributions from Wall Street. (See my article “How Subprime Borrowing Fueled the Credit Crisis.”)

Since moving on from the Senate in 2002 to mega-universal Swiss banking giant UBS AG (NYSE:UBS), where he serves as an investment banker and lobbyist, Gramm makes no apologies.

“The markets have worked better than you might have thought,” he has been quoted as saying. “There is this idea afloat that if you had more regulation you would have fewer mistakes. I don’t see any evidence in our history or anybody else’s to substantiate that.”

On April 28, 2004, in a fitting (and perhaps flagrant) final act of eviscerating prudent regulation, the SEC ruled that investment banks could essentially determine their own net capital.

The insanity of that allowance is only surpassed by the fact that the SEC allowed the change because it was simultaneously demanding greater scrutiny of the books and records of what were the holding companies of investment banks and all their affiliates.

The tragedy is that the SEC never used its new powers to examine the banks.

The idea was that Consolidated Supervised Entities (CSEs) could use internal “models” to determine risk and compliance with net capital requirements.

In reality, what the investment banks did was essentially re-cast hybrid capital instruments, subordinated debt, deferred tax returns, and securities with no ready market into “healthy” capital assets, against which they reduced reserve requirements for net capital calculations and increased their leverage to as much as 30:1. (Here’s “How Wall Street Manufactures Financial Services Products,” an insider’s look at how greed on Wall Street results in unscrupulous investment instruments.)

When the meltdown came, the leverage and concentration of bad assets quickly resulted in the shotgun marriage of insolvent Bear Stearns Cos. to JP Morgan Chase & Co. (NYSE:JPM), the bankruptcy of Lehman Brothers Holding, the sale of Merrill Lynch to Bank of America Corp. (NYSE:BAC), and the rushed acceptance of applications by Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) to convert to bank holding companies so they could feed at the taxpayer bailout trough and feast on the Fed’s new smörgåsbord of liquidity handouts.

There are no more CSEs (the SEC announced an end to that program in September). The old investment bank model is dead.

The motivation for bankers to undermine and inhibit prudent regulation is inherent in banker compensation incentives.

The Journal of Financial Research sums up the problem on compensation by concluding: “Firm characteristics that influence managerial compensation include leverage (as a measure of observable risk) market-to-book ratio of assets, size and shareholder return. Evidence suggests that Bank Holding Companies may be exploiting the deposit insurance mechanism because leverage is a significant factor in their results for incentive-based components of compensation. Our results strongly support the view that fundamental shifts in business activities of Bank Holding Companies have influenced their compensation strategies.”

And we wonder if bankers are good people or merely compensation and bonus whores…

You do the math.

As far as telling you what’s wrong with America – a lot of you wrote in to say you DO want to know – this is part of it. But we can see this part clearly.

What we can’t see is how we really got here, where here is, and where we’re going next.

You’ll get that on Sunday.

Not because I want to ruin your Super Bowl Sunday. But because I hope you pass it along to the friends you’ll gather with later in the day, and before the beer flows and the game starts, maybe you’ll ask yourself and ask your friends… is this really happening?