Archive for May, 2012

Amazing What a Few Thousand Bucks Can Buy You in Washington

28 | By Shah Gilani

Let’s talk today about the cheap cost of buying favorable legislation in the House, and about how bills are titled to deceive us, even when there’s no good reason to lie to our faces.

But first, I have to give a giant shout-out to Kevin Wack, the Capitol Hill reporter for the American Banker, which I read every day, and you should, too.

Kevin just made front and center something that I hadn’t seen nor heard about and can’t find anywhere else in print. But, it’s right up our alley here. So, give Kevin all the credit for this little tale.

Once upon a time, in a Congress full of proud and proper, true, honest, and transparent representatives of the American people, something resembling gangrene found its way into the illustrious body and backbone of some (probably all) of that elite club’s members.

The infection, green like the color of money, was most recently seen oozing out of a few House members’ back pockets.

Thankfully, the amount of green was small enough such that the civic-minded donor of the little largess wasn’t set back much for his patriotism.

Kevin, acting like the brilliant pathologist that he sometimes plays, informs us that the donor was Howard Milstein (along with his wife and some family members), the CEO of Emigrant Bank in New York. And the “largessees” were Republican Rep. Michael Grimm of Staten Island ($2,500), Democratic Rep. Carolyn McCarthy of Long Island ($4,000), Dem. Rep. Gregory Meeks of Queens ($3,000), and Dem. Rep. Carolyn Maloney of Manhattan ($2,000).

What’s newsworthy here is not that the gangrene caused the introduction of a bill titled, “A bill to amend the Dodd-Frank Wall Street Reform and Consumer Protection Act to adjust the date on which consolidated assets are determined for purposes of exempting certain instruments of smaller institutions from capital deductions.”

It’s that today it costs so little to get your own legislation written in Congress.

A few thousand bucks.

As an aside, I think that’s a harbinger of how bad things really are in the economy. What we would expect to have been an inflationary spiral appears to be suffering from some terribly deflationary effects… How else would the price of honor have come down to such piddling amounts?

Anyway, Kevin’s beef is that the bill should more honestly have been titled, “A bill to prevent Emigrant Bank from losing $300 million in Tier 1 capital.”

There’s nothing really wrong with the bill. Essentially, the Collins Amendment within Dodd-Frank says that as of December 31, 2009, any bank with more than $15 billion in assets can’t count trust-preferred securities (don’t ask, they’re a type of capital) as part of their Tier 1 capital.

Emigrant Bank had more than $15 billion back then, because it prudently borrowed $2.3 billion from the New York Federal Home Loan Bank to shore up itself in the face of the financial crisis. After the crisis passed for Emigrant, it paid the money back. Today its assets are about $10.5 billion.

The bill was written to change the effective date of the Collins Amendment from December 31, 2009, to March 31, 2010 – after Emigrant paid back its loan and had less than $15 billion in assets.

It doesn’t really matter to me that, out of 7,307 banks, only Emigrant is benefited by the “Emigrant bill” and gets to count its trust preferred as Tier 1 capital. They shouldn’t be punished for being safety conscious when they had to be.

What’s problematic is that the bill was paid for, given a less-than-transparent title (really, Kevin’s right, why not call it for it really was?), and that its sponsors tried to push it through without any hearing or committee vote.

I’ll leave you to ponder what all this means.

For my part, I’m thankful to Kevin, and to Barney Frank, who forced the bill to face the true light of day and didn’t allow it to be rammed through under the radar of the press.

Thank God for a few good men still left to muckrake and call the infected animals out into the street to be identified as what they are… the living dead, or as they are less affectionately known, (some, okay, probably most, dare I say all?) Members of Congress.

Now, because I just have to, but because this space sometimes gets too long, I’m going to wait until Sunday’s WSII to tell you how messed-up the JPMorgan trade really is, how exactly it got that way, and how it shows how Wall Street really thinks and works.

And, I promise, your eyes will widen.


Germany and Greece and the Game of “Chicken”

91 | By Shah Gilani

Summer unofficially kicks off this weekend, at least here in the U.S., as we celebrate Memorial Day.

Before we even get to the “official” beginning of summer on June 21, sweat will be pouring from every banker’s brow on June 17.

That’s the day Greeks go back to the polls to basically determine whether or not they want to remain in the euro currency bloc.

The game of chicken is on.

Germany has basically said to Greece, we aren’t going to ease up on the austerity requirements imposed on you so you could get more money from all of us, so, if you think that by electing a left-wing group of groupies who are campaigning on easing your burdens by leaning on us, your fed-up creditors, go lean on Atlantis instead, cause that’s where you’ll end up… underwater, and lost.

The Greek politicians – at least the lefties throwing curveballs – think there’s no way the Germans will let them exit the currency zone, and of course don’t want them to exit the European Union. They are saying to the population, elect us, we’ll spit on their boots and they’ll bend over to shine them themselves. And, in the end, we the people will prevail.

Don’t You Just Love Democracy at Work?

I’m talking about the “new” democracy; the too-big-to-fail democracy of the bankers, by the bankers, for the bankers.

Greek lefties have figured it out. The greedy bankers that set up the European currency apparatus so they had more borrowers to lend to and the concerted group of co-opted greedy politicians across Europe who got paid to go along with their scheme – which was to bury most of their own in a debt-death spiral – aren’t going to let Greece off the hook by letting them exit the euro currency cell block.

That’s because the bankers want their money back.

And if Greece renounces its debts and exits the currency jailhouse, well, maybe a few other countries will look at those same bankers and smile. That’s all they’ll have to do. Because the bankers will know what that smirk means. Next!

So the bankers are sure that they will all have to eat a little interest, and maybe some principal, but they’ll come to the rescue at the last second, and Greece’s liar loans will be “renegotiated.”

But there’s only one problem the bankers haven’t figured out…

What if the old barter system isn’t dead? What if Greece is willing to trade the old-fashioned way? What if euros are seen for what they really are – a currency chain that enslaves profligate borrowers in bankers’ basements?

It could happen. This game of chicken could end with the bankers not being able to cross the street, not collect what they’re owed, and worse, lose the game of dominos they’re playing with the rest of Europe’s big borrowers.

Worse, the bankers’ “too big to fail” doctrine is being severely scrutinized everywhere.

Worse, for them, that is.

Look at JPMorgan Chase’s Bad Trade

It’s worse than anybody expected. When all is said and done, losses from this hedge-gone-wrong could total $5 billion, according to some analysts.

This has brought back the limelight on too big to fail, because maybe the banks are too big to fail, but apparently they’re also too big to manage.

Wait a minute. If they’re too big to manage, does that mean they could fail? No matter how big they are? Wait, does that mean that nothing has changed?

No, people, it doesn’t mean anything has changed. Don’t panic.

Wall Street is still ripping off stupid public investors and its own Muppet puppet clients. The Facebook Inc. (NasdaqGS:FB) IPO just proved that. As if we needed proof?

Now the question is how corrupt are our politicians, really? After JPMorgan’s debacle and the Faceplant debacle, will the pimping and pandering politicians in our bought and paid for Congress (and the presidency, for that matter) sweep all this under the rug of regulation and let the bankers continue holding our nation’s people and the world’s people hostage to their own greed?

We’re about to find out.

I, for one, would love to see the Greeks stick it to the bankers and serve notice that democracy is worth fighting for and democracy means not being subject to the tyranny of bankers.

Freedom is worth fighting for. And freedom is worth dying for.

And, don’t forget for a moment that this Memorial Day isn’t the unofficial start of summer, it is the day we thank God for the men and women who have fought and sacrificed so much, and far too often, paid the ultimate price, for the freedoms we have.

Salute a soldier. Salute every soldier. They deserve it, and so much more.


[Editor’s Note: Insights & Indictments will not be published on Sunday, in observance of Memorial Day.]

Consider This Before You Buy FB

0 | By Shah Gilani

Facebook stock got off to a rocky start when it IPOed last Friday, with Nasdaq messing up order confirms and Morgan Stanley propping up the share price. On day two, the stock price had slumped more than 10% in morning trading. That’s when Shah joined Fox Business’ Stuart Varney to discuss why the stock price is falling – and could keep going.

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Inner Beauty and Outer Beauty (and Facebook, Of Course)

44 | By Shah Gilani

The day before yesterday I had a chance encounter with a very beautiful young lady.

I approached her. (I’m interminably shy, so approaching anyone is something I’ve only done maybe a few times in my life, really. Hmmm, maybe that’s why I haven’t dated anyone since last September. Don’t laugh at me, it’s not that funny… to me.) And I chatted her and her friend up for a little while.

She accepted my invitation for dinner, so we went out on a date last night.

As I said, she’s beautiful. Now, don’t get me wrong, it’s not that I’m only interested in outer beauty (but, frankly, given a choice…); I’m even more interested in inner beauty.

But inner beauty is harder to measure.

So, we’re at dinner at Caffe Abbracci – the best Italian restaurant in Coral Gables, Florida, it’s legendary – and while everyone at every table is staring at her (and I’m trying not to stare), I’m talking to her and looking for signs of inner beauty.

I’ll get back to how the date went.

Fast-forward to this morning, and the markets.

I’m thinking about her, and inner beauty and outer beauty, and am having a hard time concentrating on writing this morning’s I&I piece. But as I’m going through the research notes covering my desk regarding what’s moving the markets lately, it occurs to me that the markets are in the same dilemma.

What’s more important to investors: outer beauty or inner beauty? Short-term perspective or long-term horizons? Technicals or fundamentals? Is the glass half full or half empty? How is beauty measured anyway?

Well, the truth is that, at least for the moment, it’s inner ugliness that’s winning out. And only a heavy injection (make that a ton of injections) of Botox stimulus can smooth out all the wrinkles in this long-in-the-tooth rally (since March 2009) that’s starting to sag.

You know where I’m going with this; you’ve been hearing it from me for months now.

It’s Looking Like Game Over for Greece

All the money that’s been thrown at Greece has slid off their plate and into the sea like Atlantis. But, of course, they will need more, a lot more feeding tubes, if they are to survive to pay off their debts.

The folly of it all is so absurd to me that it’s not funny; it’s not even a Greek tragedy, it’s going to be a global catastrophe.

If lenders don’t let Greece tie on the feedback they’ve stuffed with borrowed euros (borrowed from each other, by the way, in promise, not in practice, but manifested as “credits” issued against ECB and IMF fronted loans, which are backed by “promises,” not the cash of the supporting actors in this drama… They have yet to borrow in the credit markets to then have to fork over actual cash), then Greece won’t be able to pay its civil workers, its unemployment benefits, its myriad other national obligations… and it will be game over.

The game isn’t over yet, but it’s increasingly looking like Greece will have to issue its own currency again and exit the euro arrangement that’s helped drag it down.

Hundreds of millions of euros have exited Greek banks. It’s a run on the banks, and if it isn’t stopped this week, it will be game over. But can it be stopped? Can investors and Greeks themselves find the inner beauty in an ugly, slouching, tired, and grossly overweigh-in-debt nation?

This is what’s weighing on the markets. Forget some signs of rosy cheeks in the U.S. blossoming into real beauty. If the mask of beauty covering the ugly truth in Europe slips, it won’t just be Greece, it will be Portugal and Spain and then Italy that will turn things really ugly.

Watch everything, because everything is important. But don’t take your eyes of Greece.

I’m not going to say anything more today about JPMorgan Chase, because I’ve said enough. In fact, if you read what I wrote last Sunday, and you’ve stayed up on what’s subsequently come out, you know see that I blew the lid off the ugliness under that mask last week, well before the “news” that came out this past week.

But you’re not getting away without me talking about Faceplant – I mean Facebook.

Here’s What Facebook Shareholders Have to Worry About

Forget all the hype.

And you can even forget that I told you it was a hyped-up offering, and that I would sell my shares if I was an insider, and that I definitely wouldn’t buy the IPO on its first trading day. Did you listen to me?

If you didn’t, and you own shares, here’s what you have to worry about.

First, did you get your confirmation? Probably by now you did. But the problems that NASDAQ OMX Group had sending out electronic trade confirmations in the heat of trading on Friday were staggering. (They eventually went “manual” on the opening day of the biggest tech offer ever on the biggest tech exchange in the world… how ironic… manual.)

There’s nothing out there, nothing anywhere about who or how many people did or didn’t get confirmations or when they got them. There’s nothing out there because the exchange is panicking, and if thousands of confirms, or tens of millions of shares, are up in the air… well imagine what could happen.

Imagine all the trading problems that are out there with Faceplant shares. Imagine you wanted shares, didn’t get a confirm that you bought shares, and you put in another offer to buy shares. Imagine you now own double the number of shares you wanted, but still don’t know that you own any. Imagine you bought at the high, maybe $42 and change, and imagine instead of rising well above that price, the stock fell back to its IPO price of $38, and only didn’t fall below that because the lead underwriter Morgan Stanley (thank God it wasn’t JPM) had to spend billions supporting the shares to keep it from becoming a disaster IPO.

Okay, you don’t have to imagine the last part of that, because that’s what really happened. And, actually, you don’t have to imagine any of that stuff actually happening, because it DID happen.

Now, here’s the thing.

The market had a really bad week. (You should be happy if you bought the protection I suggested previously; my subscribers are up triple digits on some of those hedges.) But if at the open on Monday, Faceplant buyers who have stock they didn’t want, want to sell it, and there may be a LOT of them, the question I have is, what will the stock do at the open and in the morning hours?

If it falls, that means the underwriters aren’t supporting it. That will be a disaster, not only for Faceplant, but for the market.

We’ve got a heavy week ahead of us. Don’t blink. This upcoming week may make or break you and the market.

Let’s hope not.

Oh, and about my date last night. She appears to be beautiful on the inside, too, but I’m going to have to do some more homework on that… I’ll let you know.


Heavy Betting in the Middle of Mayhem

0 | By Shah Gilani

There’s going to be a lot of very heavy betting over the next few days, weeks, and months on what’s going up, what’s going down, and what’s going around:

  1. How far UP from tomorrow’s IPO price will Facebook go?
  2. How far DOWN from here will JPMorgan go, with the FBI and DOJ now sniffing around?
  3. How far AROUND the globe will the fallout be if Greece loses its game of chicken?

If you don’t have the stomach for what’s going to feel like an out-of-control rollercoaster ride, sideline yourself.

If, on the other hand, you like a lot of action, welcome to Mayhem – the preamble month to what will likely be the Summer of Some Discontent.

That is, unless you like rapid-fire trading. Which, by the way, is not just fun, but can be very, very profitable. I’m in, and so are the subscribers to my Capital Wave Forecast. We’re gearing up for some heavy betting in the weeks and months ahead.

So, what’s front and center today? You know. The big three headlines: Facebook, JPMorgan Chase, and Greece. Are you sick of hearing about them? I’m not. I like trading the headlines.

Here’s my “heads-up” on the big three headlines.

1) Facebook is going to be a Wild Ride, For Sure

I didn’t even try to get into the Facebook IPO.

Too many people at too many brokerages and banks that own brokerages don’t like me because I’m constantly calling them out on their you-know-what, so I had no chance.

But if I was to get IPO shares, or – better by a mile – if I was smart or lucky enough to own some VC (venture capital) or insider shares between $1.00 and $5.00 (which is where the insiders own shares at), you can bet your bottom dollar that I’d be flipping those shares tomorrow. Maybe not all of them, but I’d sell at least half, depending on how the stock opens and trades in the first one to three hours tomorrow.

I like Facebook as a company, and I like it as a stock to own.

Personally, I don’t bother much logging onto Facebook myself, and I don’t post stuff there (I’m too busy doing things to make time to write and tell my “friends” what I’m doing, because I’m usually doing it with them).

That doesn’t mean that I don’t get it.

I know a LOT of people who are on FB all the time. Good for them, and that’s, of course, good for the company.

For sure, I will buy FB shares in the future, and I may load up on it if they do what I hope they do with their about-to-be monumental war chest of equity currency. I’m just not buying the “IPOhhh” hype.

You can read more about my thoughts on the good, bad, and ugly of Facebook’s debut at Money Morning today.

I’ll leave you with this about that: FB’s coming out could be the top of the market.

On to JPMorgan Chase…

2) The FBI’s Involvement Means One Thing

What in the world is the FBI doing, opening up an investigation into JPMorgan’s big trading loss?

And what is Attorney General Eric Holder (wish he couldn’t “hold” onto his job), unfortunately the top dog (and I mean DOG, sorry all you real dogs, I’m a dog lover, just not that species) at the Department of Justice (oh, don’t get me started, I’ll end up Fast and Furious), doing, opening up an investigation into the loss?

Forget about the DOJ. They’ve lost a lot of credibility in my book, because they’re far too politicized an agency. And that’s more dangerous than disgusting to me.

But the FBI?

The FBI isn’t interested in regulation. It’s about criminal activity.

Folks, if the FBI is involved, there must be more than just suspicion – something must smell of criminality. (Hopefully they’re not just going around attacking people and institutions based on just “suspicion,” but hey, the way this country has drifted from our Constitution and our inalienable rights, anything is possible… can you say The Patriot Act? TSA?)

I’m holding off buying JPM until I see where this is going. Too bad, because it’s been getting close to a buy. I had told you on Sunday that I’m a buyer here and down 10% to 20% lower. Now, I’ll wait a little to see if I can start buying lower than where it is now.

In the end, JPM is too big to fail and will kick ass in the future.

And last but not least, my favorite…

3) The Greek Tragedy

There’s a very, very dangerous game of chicken being played out between some ascending political factions in Greece and the rest of the EU, and in particular, Germany.

Left wingers in Greece are saying the EU won’t kick them out of the currency arrangement they’re a part of, and they won’t kick them out of the Union.

Let me say this about that.

They are dead wrong on the first count and dead right on the second count.

The Germans have their Achtung Baby boots all over Greek necks. They want to force harsh austerity measures (make that even harsher than they already have imposed) on Greece if they are going to give them any more of German taxpayer’s hard-earned euros.
But German taxpayers may revolt against the German government giving up its wealth to save a profligate neighbor who flaunts its laissez faire – some call it unfair and just lazy -ways in the face of all of Europe’s helping hands.

If the chicken can’t cross the road, the world will be eating raw chicken soup with all its attendant salmonella implications. And we’re all going to lose some weight, the ugly way.

It’s just all such Mayhem right now. I don’t see any sanity or saving grace coming our way any time soon.

But, boy, do I hope I’m wrong.

If I’m not, I’ll be making a lot more short bets than I have on now.

The Truth About JPMorgan’s $2+ Billion “Hedge”

58 | By Shah Gilani

Yesterday, Saturday morning, I was strolling by JPMorgan Chase’s Park Avenue office building in Manhattan. It was 11:40 am, and I was returning from a long walk from my midtown hotel down to Chelsea (it was definitely “a Chelsea morning” in NYC… thank you Joni Mitchell).

I hadn’t planned to walk by their office building; I didn’t even know where it was. But there I was, rounding 48th Street on Park Avenue, when I saw the JPM sign. I thought, how ironic, I’m in New York, appearing on FOX News yesterday talking about the debacle at JPM, and here I am serendipitously walking by their office building.

But it gets even better.

There was no one on the street, which is pretty unusual for New York. I was looking at the barricades in front of the building and imagining that they must have needed them on Friday, when the press and public must have been surrounding the building on news that the bank had just admitted losing $2 billion (actually it’s $2.3 billion and counting) on a hedge position.

I was thinking, poor CEO Jamie Dimon. And how ironic; he’s been publically deriding the Volcker Rule as being stupid and unnecessary, and now he’s the tempest in the teapot (which is what he called rumors about his London office’s rumored losses)…

When who else should get out of a shiny GMC chauffeured “black car” but Jamie Dimon.

Amazing freaky impossible as it was, I as just standing outside JPMorgan on Park yesterday, when out of his chauffeured black GMC ride steps Jamie Dimon in an untucked polo shirt and tennis shoes. I smiled at him and thought, “What are the chances of that happening?”

He was wearing a maroon-and-blue stripped polo shirt (untucked), blue jeans, white tennis shoes, and a long face. We were the only two people on the sidewalk, so needless to say, we made eye contact. I smiled at him and was so tempted to ask him sarcastically, “Jamie, why the long face?” But, of course, I didn’t. I simply smiled at him, and he looked through me, as if I wasn’t there, or was someone from the press who he wanted to make disappear.

I was really struck by this chance encounter. And I thought, what are the chances of that happening?

Then it hit me. Chances were pretty good. After all, where else would he be on this Saturday but going into the office to deal with the mess his bank was in?

And that’s when it really hit me. What were the chances that his bank would have lost more than $2 billion (and counting, did I say that earlier?) on a “hedge” position?

Oh, the irony of it all. Chances aren’t always just chances. Sometimes they are meant to be… because some things aren’t by chance; some things actually are what they are.

So, am I surprised that Jamie’s little bank lost $2.3 billion (and counting, did I say that?) on a hedge position? NO. It’s hubris come home to roost. Pride before the fall… and all that.

Here’s what you don’t know.

(And am I guessing here? Yes, but, not really guessing guessing. I kind of know, because I’ve kind of been there and done that. No, I’ve never lost $2 billion, or even $1 billion. But I did run the hedging operations for one of Britain’s largest banks… many moons ago. So, I know a little about what goes on at big banks.)

Trust me – that’s probably what the head trader told the risk department at JPM when he put on the Big Trade – the hedge position that the bank put on wasn’t a hedge at all. It was a bet designed to make money that was designed to look like a hedge. Which only was ever going to be called a “hedge” if they lost money on it. Otherwise, no one would have noticed that they made a ton of money on the position. It would have been buried in their financials as some income thing from something that was what they do that makes them oh so good at what they do. Did I say hubris?

Oh, I keep digressing. I’m sorry.

Here’s What Happened at JPMorgan

The idiots at the bank wanted to hedge against European credit exposure that they had.

They are idiots because the money that’s shepherded by the Chief Investment Office (some $379 billion, yeah, that number is right) is money that the bank has and hasn’t lent out, or technically is “available” to play with. And instead of parking it in U.S. government bonds (Citi has $293 billion of the same float and has 87% of it parked in “governments”), they parked a lot of it in Europe’s crappy credit markets.

Something about looking to pick up some yield, they’ll eventually come out and say. No, never mind, they’ll never admit that.

So, they get nervous and tell the CIO to hedge their European credit exposure.

That’s not stupid. What is stupid is that they put on a giant trade in an illiquid part of the markets (derivative spreads… it will come out, I’m sure. They were playing the spread between junkie credits and good credits) with, guess who? Hedge funds and a few banks.

Why is that stupid? Because here’s how trading really works.

If I know your position, and you have a huge position on, and I’m on the other side of it along with a bunch of my friends (after all, we’re all friends trying to make money on Muppets, and this time the bank itself was the Muppet puppet), I’m going to do what I have to do to get you to cry “uncle.”

I’m going to mess with your position.

I know what it is. I know it’s illiquid. I know I’m not going to let you out of it, because I’m on the other side of it and no one else wants to take your stupid, illiquid position off your hands.

Are you starting to get it?

The London Whale, Bruno Iksil, the head trader on this beauty of a trade, got into a position that he couldn’t get out of, and the boys on the other end played him like a patsy.

I’ve done that before. It’s fun… and very profitable.

JPM ain’t done losing money on this trade. I’m guessing that it’s going to cost them another billion or two to unwind this gem, maybe three. I am so laughing and so jealous that I’m not on the other side of their stupid trade.

This whole thing, the whole “chance” thing doesn’t have anything to do with chance. Things happen for a reason.

As far as JPM losing a few billion, it’s nickel and dime in the big picture of their earnings clout. Actually, I think the stock is close to a “buy” here. I’m thinking about taking on some JPM stock and adding to it, as it might drop another 10% to 20%.

But that’s just me. I like my chances.


One Thing is Shoring Up Europe

105 | By Shah Gilani

Europe, Europe, Europe…

I know, you’re sick of hearing about Europe’s problems.

But the problem with Europe is that it won’t go away. And if it does go away, we’ll have even bigger problems. What a mess.

Of course, I’m talking about the Euro-currency zone and the European Union, not Europe itself.

I love Europe. I love every country in Europe. I love the different cultures. I love the different languages. I love the different societal models. I love the history of Europe.

And no doubt all the Europeans love all the same things about their Europe – except maybe some of their history. But even more than loving Europe, Europeans love their own countries. Why? Because they have different cultures, languages, societal models, and differing views of their history. Vive la différence!

So, whose bright idea was it to gloss over (with shiny promises and, later, a shiny new currency) thousands of years of differences and shove all Europeans into a funnel in the hopes that they’d all come out the other end as one homogeneous mass of humanity?

Oh, that would be the bankers and financiers who wanted a United States of Europe so that the free flow of goods and services payable with a common currency would make everyone better off, and make themselves better, better off, by a lot of betters.

And now, what a surprise! There are differences all across Europe about, well, Europe and what it has become and where it has to go to get out of the mess it’s created for itself.

How that’s going to end is playing out right before our eyes.

And if there’s any comeuppance in the world, the bankers and political brokers who sold Europeans on “Funnel Europe” may just end up bankrupt.

Anyway, the gloss is coming off the game very quickly, and we’re seeing what’s going on. You already know if you’ve read anything I’ve written about what’s really going on.

But, once again, today, we’ve got another piece of the puzzle that’s fallen into our hands, so let’s look at it as a microcosm of what’s going on across Europe.

The double fantasy is that the little game that was played with Spain’s third-largest bank (by assets) is being played by the European Union’s euro-currency promoters. What’s the game? It’s more of a scheme than a game. And it has a name.

It’s called a Ponzi scheme.

The Spanish government is going to have to bail out Bankia, the No. 3 bank in the country, with a €188 billion book of “assets” which consists of €51.5 billion worth of property assets. (Don’t you love calling non-performing property loans “assets?”)

What you may not know is that Bankia is only two years old. It was formed by rolling up seven large, in-trouble cajas (essentially “local” savings banks or savings houses) who were in trouble because of – guess what – bad property assets. (Yeah, assets, as in ass sets.)

But it gets better…

The bank was all glossed-up, like putting lipstick on a pig, and was taken public with a wink and a nod of the pompom-wielding and cheering government. Fully 60% of the stock that was sold was sold to savers – yeah, the same savers who were the cajas’ own customers. They were duped into believing that the property problems that they helped create, had been solved. Their stock is now down 40%. Nice.

The government has been saying, emphatically, that Spain’s banking system doesn’t need any additional money.

Everything is cajalicious. NOT.

What the crooks did was “renegotiate” non-performing, bad loans so their capital position looked better and they could draw in equity capital investors. “Renegotiated” means flim-flammery accounting. It means lying and cheating.

And guess what? Now Bankia has problems. And it’s going to have to be bailed out.

Yeah, bailed out by the same government that supported renegotiating assets, rolling up the cajas and floating stock in the new Bankia. That’s a Ponzi scheme, folks.

And that’s what’s happening all across Europe. It’s a Ponzi scheme.

European banks are being given euros (okay they’re borrowing the money, but very cheaply) by the European Central Bank to buy the sovereign debts of their respective countries, which are backing the ECB and the banks that are in trouble.

Hmmm… Insolvent sovereigns backing illiquid banks buying sovereign debts with borrowed money from a central bank that’s backed by the same sovereigns?

Ponzi scheme. Goodnight.

Leave the lights on; it’s going to get a lot darker out there.


Headlines and Footsteps

65 | By Shah Gilani

Editor’s Note: There was an error in the ticker symbol of Shah’s first recommendation to Capital Wave subscribers. It should have read: Action to Take: Buy VIX June 2012 $35 calls (VIX120620C00035000). Pay up to $0.50. Apply 3% of your capital to this position.

It’s 7:30 a.m., Sunday morning, and I’m watching the Bloomberg TV “tape” as it flashes business and world news headlines.

The volume is off so I can concentrate on writing this.

Which is a good thing, because right now actor Robert Wagner is mouthing the advantages of “reverse mortgages” to older folks who may not be able to make ends meet.

In this commercial, which many of you have probably seen, he’s advocating taking a reverse mortgage out on your houses, because, after all, you’re going to die, you know, and some bank would love to have a lien on your house when you go quietly in the night.

That reminds me, I’ve got to look into the guts of how reverse mortgages really work out for the folks who, somehow, I feel, are being preyed upon, and the lenders who, of course, are the saviors of the world and deserve a little lien before you die on them.

Gee, I wonder if they’re (the banks) arbitraging or hedging their reverse mortgage portfolios with viaticals? You know, viaticals: the selling of life insurance policies where a third party becomes the new owner of the policy, pays the premiums and collects the full benefits of the policy when the insured dies peacefully, or is murdered by the viatical holder… something about not wanting to pay those premiums for very long.

Anyway, there’s a stat-arb play in there somewhere and I’m going to find it, run some regression analysis on it, back-test it, and trade it with the Goldman Sachs guys on their death-to-Muppets trading desk.

But I digress.

I was saying… I’m watching the Bloomberg headlines flash.

The Dow futures are down 186, and the S&P futures are down 23.40. If the markets in the U.S. were to open now, the Dow would open about 1.4% lower and the S&P about 1.7% lower than where they closed on Friday.

But please, enjoy your Sunday and don’t panic yet. We’ve got a long way to go before the open on Monday.

Hopefully, Nicolas Sarkozy won’t have far to go to his Right Bank apartment in Paris when the Left Bank Socialist François Hollande wins today’s run-off and kicks the dapper but dour St. Nick out of the Presidential palace.

At least, that’s the way it’s looking at this juncture.

The fact that Hollande wants to up the tax rate on millionaires to 75%, cap pay on executives where he can exert the “State’s” power, free the serfs, and redistribute all the land and luxury goods owned by LVMH Moët Hennessy Louis Vuitton, obviously has made him the darling of Bastille-bashers tired of eating cake all these years.

Why’s France important?

Here’s what I told my Capital Wave Forecast subscribers on Friday…

“Call me a nervous Nellie, if you like. But I’d rather lose out on a hedge than get killed because I didn’t have one on when the proverbial shot hit its mark.

“What’s got me nervous today:

  1. The pullback in crude oil. We’ve broken through $100 on WTI (West Texas Intermediate), and that’s bearish.
  2. The unemployment rate fell to 8.1%, and that makes me sick. Not because it doesn’t look good, but because it’s going in the right direction for the wrong reasons. Fewer people are looking for work.
  3. Tech is getting killed today, and, worse, the banks are taking it on the chin.
  4. And this one really worries me… Why was Ben Bernanke in China with Tim Geithner and Hillary Clinton? That trio doing a road trip is unprecedented. Something is happening, or about to happen, that the U.S. and Chinese economic powers are very, very worried about.

“What is it that they’re worried about? They’re probably coordinating a plan to prop up the euro, if on Sunday France elects a Socialist who says he wants to lower the retirement age back to 60, revisit all the austerity measures imposed by the Sarkozy regime, and derail St. Nick’s “EuroOne’ stance, dance, and dalliance with German Chancellor Angela Merkel.

“Disrupting the “Merkozy’ relationship that has helped stabilize Europe and the euro might be the first step in the undoing of Europe’s perceived hegemony.

“I don’t like the action today one bit!

“Let’s take on some protection.

Action to Take: Buy VIX June 2012 $35 calls (VIX120620C00035000). Pay up to $0.50. Apply 3% of your capital to this position.

“We already own QQQ June 2012 $58 puts (QQQ120616P00058000). For extra protection, we’re adding more $58 puts another month out.

Action to Take: Buy QQQ July 2012 $58 puts (QQQ120721P00058000). Pay up to $0.65. Apply 3% of your capital to this position.

“When it comes to being protective, I’ll always risk losing some “hedge’ money to rest easy at night knowing that I’ve got some protection against a severe downdraft.

“If what’s going on now keeps on going, we’re going to have to add a lot more protection. We’ll see.

“My hope is that this is a shorter-term panic selloff caused by profit-taking. That’s how it starts, sometimes. But if it escalates, it’s going to be a long, hot, and sweaty summer.”

That’s what I wrote, and those are the positions I recommended. You’re free to laugh at me and bet against us putting on a hedge, or you’re welcome to join us.

Either way, it’s starting… I can hear the footsteps.


Q&A: May 2012

0 | By Shah Gilani

It seems my Subprime Student Slaves article really struck a nerve! Nearly 250 of you subscribers wrote in to me in response to that one. Thank you.

As I said, I’m going to compile your comments, stories, and ideas in my letter to Congress and the President. And since I think what you had to say really adds to the discussion, I want to start off today’s Q&A session by sharing some of those with everyone.

(As always, you can share your own comments and questions with me by posting them to the bottom of any article, or emailing them to

Q: The obvious solution for the debt enslavement part is to change the law to allow discharge in bankruptcy. Let the racketeers eat the loss. ~ Tom S.

A: Thankfully, there is a movement towards allowing the discharge of student loans in bankruptcy. And that’s going to help. The fact that this hasn’t been allowed before is a testament to the power of the moneylenders in America.

B: Sounds like an entitlement guru talking. We are talking LOANS here. Inherent in the concept of a loan is that it must be paid back. Do you understand that students are provided a contract when they borrow money for school? Perhaps if they did their due diligence about a field they seek employment in and READ the student loan contract prior to spending the money, they may understand these loans are not free money, cannot be forgiven, and the degree pursued may not result in employment. What ever happened to the notion of personal responsibility? ~ M.P.

A: M.P., you’re not wrong. But there are other forces exerting outside influence on the inner intentions of a lot of “students” susceptible to being sold a bill of goods. Sometimes we’re stupid for being conned, and sometimes the con is just so cleverly concealed.

Q: There is this misconception that college is for everyone. Truth is, not everyone has the capacity or desire to work through a college degree… Trade school at a community college would be more appropriate and more than adequate to meet the higher education needs of many college students, with the added benefit of leading to reasonable paying jobs. ~ Don (a tenured professor with 23 years in the system)

A: Don, thank you for lending your credibility as an educator to this discussion and for stating what a lot of your peers would likely not have the guts or honesty to say.

Q: The situation is worse than you depict. I have recently found out that when getting a loan, the lenders do not ask the cost of the educational program. The loan amount is often more than the students need, and as a result, they spend it on things they do not really require while getting educated (fancy accommodations, cell phones, etc., etc.). ~ Gordon

A: You’re right. Lenders want to give out the money and don’t care how it’s spent, as long as they can force borrowers to pay them back. Sickening!

Q: Unless a kid is in a hard science or engineering school, I think the government should not give out any loans. Subsidize in areas that we need more people and the hard sciences are in dire straits trying to find qualified employees is difficult at best. ~ Sean B.

A: Sean, I like your idea. We should work on it because it makes sense and addresses a lot of the issues with too much liberal arts education funding. Not that there’s anything wrong with liberal arts at all; it’s just that today’s world demands different, more “mechanical,” if you will, skill sets.

Q: It all starts in the home. There is way too much coddling going on out there with kids these days (strictly my opinion). They are graduating with no clue on how to get along out there in this big old world. No work ethic, no sense of responsibility when parents give them everything they want or desire. When does anyone have to “earn” what they get anymore? ~ Gomer

A: Gomer, I’m guessing you’re talking about the U.S. for the most part. And if you are, I agree. However, in most other parts of the world, an education is a coveted, appreciated, and manifested endeavor, which l think you may be saying, that starts with parents instilling personal responsibility and ambition in their children.

Q: The education “problem” started years ago when the goal of education was shifted from improving the mind and learning for its own sake, to a philosophy of income enrichment. A degree was equated with more money and a financially improved life style. Schooling became synonymous with career advancement – real learning went out the window to be substituted by an “investment” in the future. Courses were “dumbed down” new “bird” courses sprouted up – anything to keep enrollment figures higher and higher – students became not scholars but numbers, and the educational empire expanded, like the housing market – where everyone was “entitled” to a college education much the same as everyone was “entitled” to a home with granite counter tops. And in both cases, the dreams turned into financial nightmares. ~ Jim

A: Jim, wow, that’s hitting the nail on the head. Superbly said, sir.

Q: I liked seeing that you want to do something about the student loan crisis. I didn’t like seeing that you want to take it to the government to be solved… A suggestion for you and my fellow readers: Get the Rosetta Stone Mandarin Chinese series.It’s an education worth the money (for the equivalent of four tanks of gasoline). ~ Teri B.

A: Teri, if you’re implying that China is taking over and we all better learn Mandarin, I’m laughing. Not because you are probably right, but because you’re funny!

Okay, now let’s move on to “How About This for Sick?” – another article that generated a lot of really thoughtful reader mail.

Q: Just think of how much profit would be lost if they [did find] a cure for cancer. All those grants not given, all those medications not needed. How could researchers and big pharma survive? … Cancer is big business after all. It’s all about the money. ~ Frances P.

A: Frances, I’ve got the same nagging feeling, and it sickens me. Money, money, money, it’s just so disgusting how money trumps everything, including lives lost in the pursuit of more of it.

Q: Will the responsible parties EVER be called to task for this horrendous [misappropriation] of this money and all the deaths that could have been avoided??? ~ Doc

A: No, I’m afraid that’s not going to happen. Too many smart people would look too stupid. And, besides, there’s too much money to lose by the schools and companies that SHOULD be held accountable.

Next, some interesting ideas and questions about what’s happening in Europe.

Q: I expect the Greeks, and maybe the Irish to get fed up with austerity measures and choose to just outright default. I have no idea about the political fallout, and don’t really care. It is up to the folks who live in Europe to work that out. But I expect European stocks to drop like rocks. At that time I am prepared to scoop up some of the better ones for pennies on the dollar. ~ Perry

A: Welcome to the club, Perry. I’ll be picking up the penny stocks right next to you.

Q: Throughout Europe (including the UK) politicians are losing credibility with the electorate. Watch the Greek, French, and next year German election results, and you will see just how ephemeral and weak the current leadership is in all cases. When the first country leaves the euro, there will be massive financial chaos at ordinary consumer/citizen level as well as a breakdown in law and order in many places, particularly the big city ghettoes… I should welcome any other suggestions for coping with the forthcoming mess. ~ Charles V.

A: Charles, you echo my darkest fears. The people of Europe are only going to take so much. I’m afraid of a long, hot summer that breeds resentment and riots. Spain’s unemployment is 25%. But worse, youth unemployment is 50%. The other “peripheral” Euro-zone countries aren’t as bad, but they’re pretty bad.

I can’t help but think about that old Lovin’ Spoonful song, “Summer in the City:” “All around people are looking half dead, staring out the windows, hotter than a match head.” Heaven help us if that match ignites the dried up hopes of the unemployed masses.

Q: “Money for nothing and chicks for free.” Currency can’t be printed with abandon without consequences. To believe otherwise is to have faith in… well… central bankers. Regardless, if printing money could create thousands of productive companies developing wealth-producing technologies like Apple, we’d already be colonizing Mars and mining asteroids. ~ Phil S.

A: “Ah that ain’t working, that’s the way they do it…” Phil, have you heard the intro to this Dire Straits song? A lot of folks don’t know, but it’s Sting. Oh, and I agree with your point.

Q: Shah, can you see any kind of solution to the problems within the Eurozone Creditsystem? I am afraid by June we will have the break down. ~ Heidi

A: No, I can’t see a solution at this time. And, that’s what’s got the hair on the back of my neck standing straight up.

Now for some other really good questions and comments…

Q [Re: Here’s Why Earnings Season Can’t Reflect Reality]: Seemed like a couple of years ago many companies were blamed for painting a too rosy financial picture and then disappointing investors when the numbers were reviewed. Some analysts were also blamed for interpreting a rosier outlook then should have been expected. Now the opposite is the case? ~ Mike B.

A: Yes, now the opposite has been exposed as another form of manipulation.

Q: Each day as I watch the markets move thinly higher I ask what is it that I am missing? ~ Dubious

A: GREAT question. What’s interesting to me is that as volatility increases on big down days, volume picks up considerably. Part of this is a function of volatility-based algorithmic (computerized) trading. I’ve noticed as volatility spikes and spreads widen across different instruments, the machines start stepping in, more and more. That’s working now. But as these algos are “learning” that this is working and they’re making money, they may be setting themselves up for the next Black Swan, fat tail event that they are “un-learning” themselves is still out there.

Volume on up days is less, besides the fact that there’s very, very little “public” investing and participation, because the algos, the way they’re written to value time-in-trade when there’s less volatility, narrow spreads and at the same time thin out what’s being bid for and offered. Volume metrics aren’t what they used to be.

Q: It is my thought (maybe even my prayer) that $200 a barrel oil this summer is going to shock and shake America (as it has not been shocked or shaken before). And I fervently pray ( though I am not religious) that this turn of events will be so upsetting as to force Americans to go back to what they were born of (and have done more effectively than any other nation before or since). That is, an innate ability of realization, recognition, innovation and creation of new workable ways of getting down to business (and getting on down the road) when it’s time to. ~ Philip H.

A: That’s harsh medicine, Philip, and you are probably right. But that would inflict a lot of pain on a lot of people doing their best and struggling. Hopefully, there’s an easier way to wake up America. Maybe we can start by putting most of our imbecile, blathering, lying, pimping, and pandering politicians to sleep.

Q: A question. Given the known practice and technique used in hammering the price of silver, how do we know that the like manipulation is not happening to certain stocks? Sudden rises and/or falls can be interpreted this way by suspicious minds that have been burnt in the past. ~ Benton M.

A: There is manipulation going on. In fact, there are so many different ways stocks and other tradable instruments can, and often are being manipulated, it would make most investors sick. What’s dangerous for all of us is that manipulation is becoming part of the fabric of the markets. Mind you, I’m not saying it happens all the time, just that it happens.

Q [Re: The Markets Are About to Tell You Something]: Shah: if the markets go south, and inflation enters, what happens to commodities, and metals? ~ John S.

A: If the markets go south, in a steep swoon, commodities and metals will take a hard hit and inflation will give way to deflation. Don’t forget, all the stimulus around the world was aimed at preventing deflation. Commodities and metals (basically the same asset class, with gold being the exception… sometimes) are fast-buck trading vehicles, especially with the advent of ETFs, so if there’s a market plunge, all boats that investors have piled into will spring leaks. Inflation will be a problem once the world gets back on its collective feet. Then commodities will rise, and they will be the best investment vehicles around, for a long time. But that’s going to take a lot of global growth, which is coming, just not yet.

Q: I too think disaster is brewing… Things are really not much better than 2008 except now I have a job after not having one for over two years. But I also make 50% less than I did in 2008 and the cost of living certainly isn’t 50% less. Something has to give. ~ Corvette D.

A: Dear Vette, I’m glad you’ve gotten a job. I can only imagine how tough it’s been. Not that getting paid half of what you’re used to is a gift in any way. I believe you’re right, something has to give. And, I think it will. I’m just afraid that it’s going to get worse before it finally starts getting better. Keep hanging in there. You’re a hero to me.

Q: Possibly shale gas could be enough to bring back manufacturing [and] help our balance of payments, due to less oil importing. But can it evolve fast enough to save us? We and Europe had better hope so. ~ Joanne R.

A: Yes, Joanne, it can happen. Sadly, I doubt it will. There’s too much money in the old oil business, and it will take time for the oil majors to “capitalize” their existing investment in exploration, wells, pipelines, storage, etc., to see natural gas rise to where it is our go-to fuel.

Q: Only in recent times I am noticing your tilt towards a non-existent “free market” and against any extra-market intervention (howsoever imperfect it may be) in the workings of the imperfect markets. If governments and monetary authority intervene, there is a purpose beyond swindling and cheating. When a company like Goldman Sachs manipulates the market (financial or energy) the whole and sole purpose is swindling… I am hoping to see more sanity from you instead of pandering to the already mythological “free market.” ~ Viswa G.

A: Viswa, please allow me to clarify my thoughts on free markets and regulation.

I’m for free markets with regulation. There’s no such thing as one without the other, unless we’re living in theory… but I just pinched myself, so I think I am, therefore… I get into heated debates with “theorists” who ridicule me for advocating free markets and regulation. They say I don’t get real free markets if I am calling for regulation of them… How can they be free, I’m asked. To me, free means the least amount of “friction” with that friction being prudent, concise, and transparent regulatory oversight.

Q: Please continue your “Tell it the way it is, people” articles. I think it is what people already know but can’t believe it until it is in black and white. You, my friend, get a trophy for your game face alone! ~ T.

A: I’m laughing, thank you. I get really angry at what I see sometimes, and I’m very fortunate to not care who hates me because I say what I say. And believe me, there are folks out there that hate me.

Q: Did you admit you were wrong last year about shorting bonds? ~ Ray

A: No, I didn’t admit it. But I’ll admit it now. Thankfully we didn’t put on any big positions, but as usual, wanted to “leg” further into a hopefully profitable position. When it went against us by a digestible percent, we got out and stayed on the sidelines. However, the bond market has been almost as volatile as stocks in the past few quarters. There’s a lot of money to be made in the bond market. We will focus more on that and I will throw out some trading ideas to you. I’m not always right. But I’m less wrong.

Q: I have a follow-up question concerning the housing market.If someone has a long investing horizon, say 5+ years, would it be prudent to invest now in real estate, whether directly or in related equities, or is there still significant downside risk?~ Dominick S.

A: Dominick, I think we have more to go before we bottom out in housing. But we’re getting close, and a turn can happen any time. I just don’t expect it to be a reversal. There will be a pop, but not a rocket ride. Taking positions now on housing and adding to them on dips isn’t going to hurt you if you have a long horizon and can carry the positions.

Q: What happened to the real issues in America? Elect Romney and you will see a repeat of Bush but with even more incompetence and more extreme measures because that’s the direction the Right has taken. The Left isn’t much better, bending over and leaning toward the Right asking for permission to live. Democracy is in serious trouble. What do you think we can do?I’d really like to know.I feel paralyzed with fear and loathing. ~ Beverly J.

A: Super good question. You and I – and the rest of America – will be addressing the real issues wherever and whenever we can. It’s just going to be hard to get our self-serving politicians to do the same. But, with your help, we’ll reach out to as many of them as we can, and whack them with our furled-up flags.


Posted in Q&A