Archive for August, 2012

Here Comes Obamatirement

15 | By Shah Gilani

Our politicians, our legislators, they are always right, and they’re all about our wellbeing, our future. We owe them.

After all, where would we be without our government? Would any of us have succeeded at anything without their helping hand? Where would we be without the handouts they shower us with from the small tax burden they ask of us?

Now, in their infinite wisdom, our leaders are looking out into the future to make sure our retirement prospects are financed and our promises to ourselves are fulfilled.

I’m calling it one small step for Californians, one giant leap for Americans.

I’m talking about California Senate Bill 1234 and what it will do to guarantee (because you know only the government can guarantee anything, and mean it) a securely financed retirement for private sector workers in California (some 6.3 million of them) who presently don’t have a pension plan or retirement fund to fall forward onto.

Oh, this is brilliant. It is a model for the rest of America. Now that we’ve got Obamacare, we’re going to get Obamatirement, too, when the rest of the country sees what California is trying to do.

Let’s take a look…

The bill was concocted by the Assembly Committee on Public Employees, Retirement, and Social Security and approved by a vote of 23-13. It establishes the California Secure Choice Retirement Savings Program “to operate as a state-administered retirement savings plan for private sector workers who do not participate in any other type of employer-sponsored retirement.”

It’s brilliant.

It’s an opt-out program. You’re in until you’re out. And if you’re out, your employer will have to pay a smallish $750 penalty (every year). When you’re in, you’ll have 3% of your income skimmed and sent to some manager of money (they could be a private pig or a public sow), and someone you don’t know will decide who gets to manage your retirement money.

You won’t care what they invest in, or that you might be a better manager of your own future, because the returns will be guaranteed, you know. Yes, an insurance company, that you won’t pick, will guarantee your return will be at least… are you ready for this… equal to the return on the U.S. Treasury 30-year bond. In other words, close to 3% year or more, but not likely to be too much more than the rate of inflation. Whatever, it’s guaranteed, you know.

But what about the insurance company that guarantees your future? Who will guarantee their future? Oh, you worry too much. The government, of course! The chosen insurance companies will all be too big to fail, and if they do, guess who steps in?

You can’t lose on this one.

And who cares that the pay-to-play game will be huge on this scheme? That there will be huge monies to manage for giant fees and some private playas might pony up some fat envelopes of you-know-what to get that business that you won’t have any discretion in meting out?

Or, maybe, if you’re lucky, your money will be directed to the brilliant managers of the California Public Employees’ Retirement System (Calpers), who get your money for the political favors they buy with their fees for managing it.

It’s just so circuitous that you can only call it what it is: a positively crooked feedback loop.

Anyway, they do a good job, those Calpers managers. Why, in the past five years they’ve generated almost 0.57% per year. That’s right – that’s not the same as the 30-year bond, but it’s close to what you get in a savings account or a 30-day CD. Brilliant.

Don’t be so cynical. This is not another tax; this is another pox. A pox on Californians if this Bill passes, and a pox on America if it morphs into Obamatirement.

Of course, I’m kidding. Our pension schemes, the public ones and the private ones, are all doing just fine, thank you.

I’m not worried that private pensions are underfunded by more than $600 billion (according to S&P) or that public pensions are underfunded by between $1 and $4.6 TRILLION dollars, folks.

Why worry? The IRS just ruled, on authority of a Transportation funding bill (Highway Bill S.1813), that the discount rate (the thingy that is used to calculate how well funded pensions are) can be tweaked to help corporations. The long and short of it is, corporation’s contributions to their pension plans in 2013 just went down from $78 billion to $8 billion.

Who says the government can’t make magic?

I wrote about this stuff here before and over at Money Morning, but you might want to re-read it in light of this new wrinkle called Bill 1234.

Not that there’s anything to worry about. Our politicians, our legislators, have our best interests – and their deep pockets – always front and center, unless they’re at the back door.

Let me be serious for a moment.

Want a real retirement? Follow me. There are no guarantees, but at least you will be fully in charge of your own future. You will learn how to make real money and you will get expert guidance from me on what stocks to buy and sell, how to cut your losses, and how to book handsome gains on a diversified rocking portfolio.

If you do want my help, and are thinking about trying out my Capital Wave Forecast service, do it today or tomorrow, because this is the last time you’ll ever be able to get in at this price level. At 5 p.m. Eastern on Friday, the price goes up significantly.

Again, just click here.


What I Learned About Making Money

1 | By Shah Gilani

Thirty years is a long time to be doing anything; but it’s a short time if what you’re doing is something you love to do. And the time spent is even sweeter if you’re making a lot of money doing what you love to do.

I’m very lucky. I’ve been trading for 30 years. I love what I do. And I make money doing it.

The truth is, I didn’t know what I wanted to do when I was growing up (some people say I’m still not grown up, I say thanks). I wasn’t handed anything. I didn’t go to college right out of high school. I didn’t know what I wanted to do. I didn’t know what to study.

So I worked, I travelled, I adventured. But the operative word there is “worked.”

Don’t get me wrong, I’m not lazy, I never have been, but I don’t like to work. I came to that realization after being a caddy, then a lifeguard, then a construction laborer, then a not-so-great carpenter, a dishwasher, then a not-so-great cook, tarring roofs in Arizona (in the summer) and working three jobs (at the same time) when I wanted to live in California and moved to San Francisco.

Then it hit me – all this stuff is work, and it feels like work.

I thought hard about what I really wanted to do. Something that was work, but could become a career, and it had to be something that wasn’t really like work, at least the kind of work I had been doing.

I didn’t have any money, but I had a plan. I figured that the best way to make money (when you don’t have any, but know it takes money to make money) is to make money with other people’s money.

That’s exactly what they do on Wall Street, so that’s where I was headed.

First I put myself through UCLA. I was 22, and back in 1978, tuition at the University (I had gotten a California driver’s license when I lived in San Francisco, working three jobs, did I say that?) cost me $238.00 a quarter, plus books, of course.

I packaged, loaded, and delivered health food from the pre-dawn hours to early morning (lucky me, my route took me along the beautiful Southern California beaches), went to school during the day, and painted bars after they closed. I’m no stranger to hard work.

But along the way, I had this plan, and I had to pay to execute it.

After four years – and about 50,000 miles on my only ride, a 1972 Triumph Bonneville – I got my first job in “the business.” I was a clerk for a market-maker on the Floor of the Chicago Board of Options Exchange.

I was fast learner. It’s easy to learn fast, and keep learning (I’m still always learning), when you’re doing something that’s not like work, but more like a game and you love it.

A year later, I was general partner of a hedge fund. It wasn’t my money back then; it was other people’s money. Not a lot, $10,000,000. I leveraged that one hundred times.

I’ve been doing what I do now for 30 years. And I am one very lucky lad, because I love what I do, so it’s not really work.

My point in telling you this story, my story, is that you can do it too. You can make money trading and investing.


Well, you can learn from the people that know what they’re doing, like I did.

You can become a successful investor by learning that trading is the first step towards successful investing. Because every investment starts out as a trade, you take a position. That position becomes an investment if you end up holding it for a good while. Otherwise, it’s all about trading. And maybe I can help you with that.

I learned to create an investment portfolio by trading into great positions. I’m never married to any position (maybe that’s why I’ve never been married myself, ya think?), but I like building on my winners and am never afraid to jettison my losers, which I always have my share of – that’s part of the game.

So, now, as in right now, while we’re here in this strange place with the markets doing what they’re doing, I’m rebuilding my portfolio and the portfolio I recommend for my Capital Wave Forecast subscribers.

We just cleaned house and took profits on NGG (34%), T (22%), INGR (20%), MO (20%), KMP (20%), and a few more decent gainers. And we just lost 5% on two defensive options positions we had on for protection, because you have to be protected at all times.

My point here is to take winners when you’ve made some decent money and you think those positions are getting a little tired. And there are times, like now, when you should build a rounded (we’re always well rounded) portfolio that addresses where the new opportunities are coming from now.

I like working on my portfolio. I like taking on the opportunities that are always out there. I don’t like losing, but I don’t hate it, because I don’t ever lose so much on any trade that I have to worry about it.

If that sounds like something you want to do with me, you can check out the details of a Capital Wave Forecast membership right here.

You’ll get immediate access to our portfolio of trades, and I’ll share some of what I’ve learned over my 30 years doing what I love to do.

I hope you can take some of what I’ve learned to do, and love doing, to the bank. It’s fun.

Have fun. Life is too short.


Where Would We Be Without the Fed?

25 | By Shah Gilani

We’ve arrived. We’re exactly in the middle between here and there.

The problem with being here is the “there” part.

I’m talking about where the markets are and where they’re going next. Is “there” backwards or forwards? Are we coming or going from here?

Before I give you my own forecast, and recommendation, let me say this about that…

Here are the two best forecasts I’ve ever heard:

  • “It will fluctuate,” which was what J.P. Morgan famously answered when asked what the market would do, and
  • “I cannot forecast to you the action… It is a riddle, wrapped in a mystery, inside an enigma,” which is what Winston Churchill famously said, not about the market, but about Russia. (The full first line is, “I cannot forecast to you the action of Russia.”) But you get the picture.

American markets are touching their highs. It’s as if everything is clear and sunny. It’s as if forecasting is as simple as looking out the window and calling out what you see.

It’s clear and sunny. Haven’t you looked outside? If only it was that easy…

But when you do look outside, let’s say, through a window, you only see in one direction. The question can then be asked, is the weather you’re looking at coming or going, or is it here to stay?

America, and indeed the global financial markets, came to the precipice of a cliff and barely caught their balance before plummeting into an abyss so deep and black that no one knows where it would have taken us. But my guess is to Hell.

The rope that held us from going over was stimulus, massive stimulus.

That stimulus was never mopped up. It’s been left out there like water on everything after the fire has been doused; and there’s more coming.

The Federal Reserve, which isn’t playing just 18 holes, but seems like it’s playing a marathon round of swinging hard and gently, but constantly swinging, is teeing up another ball with some little marking that reads QEsquared, or something like that.

Here’s my guess on what the Fed is going to do…

They’re going to stop telling us what they’re going to do. They’re going to keep us guessing about how much of the stimulus hose they’re going to unravel.

It’s an election year, you know. That means they can’t take sides. So, they’re going to do what they do under the cover of, “We’re not political; we’re going to do what we’re going to do in such a way that you idiots out there won’t know and make a judgment call on either candidate or Party.”

You see, they did that once. It became known as the Saturday night massacre. That was back in 1979, when Paul Volcker, then the Fed Chairman, on a Saturday, decided to shrink the money supply and not target interest rates as a means to kill inflation which was ravaging the economy and the country.

It worked, eventually. But it didn’t work very well for incumbent Jimmy Carter (there were a lot of other things that weren’t working for J.C. at that time), who bore the brunt of quickly rising rates and lost the election to a guy by the name of Ronald Reagan.

The point is, ever since then, the Fed has been aware of their power to move the electorate. So, they’re going to use their apolitical posture as cover to hint that they’re going to just make QE a forever program that they’re going to employ until either the markets make new highs and keep going or the economy grows at 3% to 4% per year, forever.

Oh, and China is about to do some of the same unraveling of its stimulus hoses.

What does all this stimulus have to do with the market direction? Everything.

Without it, we’d be 50% lower across the board. Yes, I am saying that the markets are 50% higher than they would be without the Fed’s pump priming. The same goes for the rest of the world.

But here’s the problem with picking the direction, or forecasting the weather. Nature finds a way. The natural order of markets can’t be messed with forever.

God help us when Mother Nature shows her wrath, and she will.

Europe is still a mess. Take away the stimulus there, and the world folds. Because China will fold, and the U.S., no longer an island, will fold too.

The problem is fiscal discipline. It’s coming. And it’s aimed at mopping up some, or a lot of that stimulus spillage that’s been floating higher and higher spending and higher and higher deficits.

So, what’s my forecast?

Either the markets will be stimulated higher, which is most likely under the present circumstances, or they will fall, once we’re spanked with the fiscal discipline paddle, or we’ll stay right about here in Goldilocks land – where it’s not too hot, not too cold.

My recommendation?

  • Straddles. Why? Because the markets will tend to fluctuate, and right now they are a riddle, wrapped in a mystery, inside an enigma. I’d be buying straddles here – long horizon, out-of-the-money straddles.
  • And I’d be selling calls on all my nice dividend-paying stocks and buying them back if they get called away and then selling a lot more calls on them.

Nothing goes up forever, especially when the hot air is rhetoric.

Be careful out there.


Just Another Summer on Wall Street

15 | By Shah Gilani

Another week goes by on Wall Street, and it was a quiet one. For summer, that is.

And thank goodness. All the scandals, all the negative news, all the time, always something. I’m getting tired of writing so much.

It’s my summer too, you know.

So, when my extraordinary good fortune led me into the company of a spectacular woman this past week, I escaped the Street reality, enjoyed the beach, the Hamptons… and did I mention a spectacular woman?

My only problem going to bed last night was, what was I going to write about this morning?

Then, of course, I woke up. And reality hit me.

Just because I was out of touch (from reality) last week doesn’t mean the surreal wasn’t spilling out all over the Street.

Okay, so it was little stuff, but it’s still stuff.

Like finding out that Vikram Pandit, CEO of that little banking outfit Citigroup, got paid more last year than the bank paid in taxes.

That’s news you ask? No. Granted, we know that all those poor banks that suffered deep losses on account of a lot of sore-loser homebuyers who got the Street mantra wrong (it’s “buy high, sell low,” right?) won’t have big tax bills for a while because they saddled the good-guy banks with huge tax loss carry-forwards.

Besides, Vik (can I call you that?) deserves it. Can you imagine all the negative press he gets? He deserves more; I say give it to him and the other banksters who have to work so hard to keep their jobs while their firms don’t have to work nearly as hard to not pay taxes.

And then I heard that Jon Corzine was thinking about yet another career move. Yeah, that Jon Corzine. He, the former CEO of Goldman Sachs, former senator and former governor of New Jersey, former head honcho at some sad outfit that sadly didn’t make it after paying him $8 million last year… what’s that company’s name? Oh yeah, MF Global.

I don’t remember what the MF stands for, but I think the firm’s old customers know.

Well, J.C. (can I call you that?) thinks he’s similar to that other J.C. fellow, and can walk on water too. He wants to maybe start a hedge fund.

I’d trust him. After all, he was a U.S. senator, you know. A man of the people. I hope he does it. I have some loose change I’d throw him. Why not? He runs a loose show and knows how to change people’s lives. (Just ask his customers, who know what MF stands for.)

Yeah, like I said, it was a slow news week on the Street.

Wait, I almost forgot. That’s because it’s not news. Some bank somewhere is always “settling” with some idiot regulator who just wants to make his own career moves, or wants to fill the coffers of his own loose regulatory body’s cavity.

Apparently, and I know you’re going to just yawn, another bank was caught in a regulatory vice and had a fine extorted from it for doing nothing wrong.

Oh, the humanity! Will these poor banks ever be left alone to go back to doing J.C.’s work?

Standard Chartered, a little outfit (NOT) that was just keeping up good customer relations, had the unfortunate bad luck of getting caught naked.

Well, not exactly naked, not in the way you’re thinking. Naked as in the “wire stripping” transactions it was processing for our closest ally (at least it used to be) in the Middle East, Iran.

I know, it’s no big deal. They hid the fact that they were doing business through New York for Iranian businesses and maybe some “organizations.” So what.

I mean, so what, they got caught. They ended up paying (I mean settling) a small fine (tip money, really) of $340 million to yet another regulatory extortionist ring.

I feel sorry for them. Why? Because now that their nakedness has been exposed, they’re being sued by the estate of the U.S. marines killed in Lebanon in 1983.

What? Yeah, it appears that some lawyers think that the innocent bank (they never admit or deny, so they’re innocent, you know), because it may have facilitated some interests inimical to the U.S., could have been responsible for that former ally not making good on a judgment rendered against it by a federal court in Washington, demanding it pay the Marines’ families and estates some $2.6 billion.

Anyway, you’re probably scratching your head and saying to yourself, “Boy, Shah must be desperate to find anything newsworthy this week, he’s bringing up stuff from 1983!”

Sorry, that’s what happens in the summer on Wall Street. There’s nothing new. It’s always the same.


Industry Capture: How Wall Street is Destroying American Exceptionalism

17 | By Shah Gilani

America is slipping into darkness.

One by one the lights are being turned off in our “shining city on a hill.”

And Wall Street’s greedy hand prints are all over many of the darkened switchboxes.

Of course, politicians’ grubby, filthy fingerprints are everywhere too; but there isn’t enough cyberspace to launch into when discussing that black hole.

Besides, this e-letter specializes in Wall Street indictments.

You’ve heard about regulatory capture. I just wrote about its dark side in this space.

Regulatory capture is when regulators become captives of the individuals and firms they are supposed to be watching, regulating, and disciplining when they break the law.

“Industry capture” is beyond just regulatory capture.

Here’s what I mean…

Industry capture, which is unique to only a couple of American industries (hint: oil is the other one), is when the industry itself becomes so omnipotent, so all-consuming in our lives, so all-consuming of our money, so filthy rich that it buys and sells government officials, legislators, administrations, and presidents. So powerful that it has effectively captured the nation.

What isn’t spoken about, what isn’t generally seen (although most of you who comment here see it), is that Wall Street holds our nation captive.

Far from being mere unintended consequences on the road to facilitating capital formation and anchoring the capital markets, Wall Street turned a fairly straightforward one-way street leading to more, bigger, and better businesses across the country and the world into a superhighway with more twists and turns than a grand prix course.

And worse, there are no speed limits, and the roads go both ways at the same time, and the toll booths are manned by Armani-clad, Manolo Blanik-wearing bankers, traders and their flame-retardant and blame-retardant suit-wearing managers, and executives that tally the take.

How did an industry that accounted for between 5% to at most 7% of GDP in this country in the 1980s go to being responsible for between 17% and 20% of GDP by 2007?

That’s a lot of paper shuffling for some very lofty fees and fringe benefits.

But, of course, our GDP was made all the better and more stable and secure because of the Herculean efforts of all those banksters and pranksters… NOT!

We’ve been set up like bowling pins. Used like mailboxes in an alley where the Street’s bills pile up with public’s name on them, special-delivered at the direction of the new postmasters, Jamie D., Lloyd B., and Victor P., or DBP & Company for short.

Yeah DBP as in don’t bother pretending you don’t know we own your asses. Their mantra is “we make it rain, we bring the pain, we tally the gain, thank you again.”

Industry capture is a dead end for us, but a highway to riches for our captors.

If we’re ever going to get off this unlucky four-leaf clover interchange where we’re going round and round ending up at the same toll booths again and again, we’re going to have to fire most of the politicians in America, most of the bank executives, and most of the captured regulators.

And for that matter, the current president, who spoke a tough game but was himself captured by Wall Street money and fiddled with healthcare while Wall Street burned on.

Not that Mitt, whose glove is full of Wall Street money, will be any better. He might be worse.

Ron Paul, where in heaven’s name are you? Have you forsaken us?

By the way, I’m not leaving you hanging as to what the games are that are being played that turned Wall Street into easy street. Starting tomorrow in Money Morning, I’ll be detailing the cold, hard facts about what unintended consequences that have been planned all along.


Honda, Toyota, GM, or Ford? Shah’s Split Decision

0 | By Shah Gilani

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This is the Definition of “Regulatory Capture”

42 | By Shah Gilani

I’ll make this short.

It’s game over.

The match that ended on Thursday wasn’t the final match in the series being played here on U.S. fields.

But it might as well have been.

The score was so lopsided, it reminded me of those long ago and far away matches where everybody cheered the action, not the players, because the deck was always heavily stacked and the outcomes almost always a foregone conclusion.

Those days, long ago, such lopsided matches were all the rage in Rome. And typically, when scores were posted, it would be something like Christians nothing, Lions twenty.

On Thursday, though the score didn’t reflect the intensity of the match, the outcome was just as lopsided.

It ended up Justice nothing, Goldman Sachs won (I mean one).

You see, there is no fire raging. It’s all just smoke on the water. That’s because the regulators – and oh yeah, that includes the Justice Department – have been thoroughly captured by the real lions of Wall Street. (Now, there’s an idea for a reality T.V. show.)

In case you were too busy watching those other matches over in London, here’s what just happened.

On Thursday, the Justice Department ended its fraud probe of Goldman Sachs.

It turns out that, after looking up Goldman’s skirt, they found that all that screwing going on up there was just part of the orgy that most Americans were reveling in. In other words, that whole mortgage screw-all, it was all between consenting adults.

But no one wants to admit that absolute power corrupts absolutely, or that there’s any such thing as “regulatory capture.” If you don’t know that term, it’s what we call it when a regulatory body, charged with acting in the public interest, is instead swept away and dominated by the interests of the sector it’s supposed to be regulating.

Because of that, and because the poor banks have been screwed enough for just doing their jobs lending us all money so cheaply, the Justice Department proved once and for all what hacks they are, with their statement on ending their probe.

They said, Sure, our job is prosecuting financial fraud, but “protecting the integrity of our banking system” is and will continue to be the department’s “top priority.”

The criminal investigation was led by the New York field office of the Federal Bureau of Investigation and included the U.S. Attorney’s Office for the Southern District of New York and the Special Inspector General for the Troubled Asset Relief Program.

They’re all captured.

It’s game over. They’ve won.

What am I going to write about now?

What I See Ahead for the Economy

31 | By Shah Gilani

Let’s try and be insightful today, shall we?

Equities have been rallying; we’ll call it the summer rally.

Major benchmarks are only a few percentage points off their highs. It’s all good, right?

I don’t think so.

We could use the old “can’t see the forest for the trees” adage, which means, sure, you can look at all the trees around you and see they’re still standing, because you’re in the middle of the woods. But you can’t see the whole forest, because you’re too flat on the ground and too deep under the canopy.

Let’s rise above the treetops and market highs and look down, to get the big picture.

Here’s what I see. There are too many trees to measure the health and height of each one. But I see something much simpler on a path through the woods that we’re going to look at and draw our insights from.

Yes, I see a team of horses, yoked together, pulling a huge wagon up a steep, meandering slope.

One of the horses embodies central banks, banks, bankers and market players. The other horse embodies the markets: stocks, bonds, commodities, and real (estate) assets. The large and heavy wagon they’re pulling is the economy. It doesn’t matter which one. Think of the U.S. economy, or the European economy, or the global economy.

Some of the stuff in the economy wagon includes horse parts, things like equity, fixed income and real assets, stuff like real commodities, too, not just the paper stuff.

Did I mention that the horses are yoked together? Did you notice that the horses are pulling the economy wagon?

“Don’t put the cart before the horse” is another adage.

Well, here’s what happened, at least as far as I can see from up here.

The wagon got too heavy. Mostly from real estate and paper instruments that ended up getting soaked when the leverage bubble, which got blown up by overuse of the low-interest rate pump, popped and rained on everybody’s parade.

So the guys who own one of the horses in the team (did I say they were yoked together?) decided they were struggling mightily and could end up being dog food (they were already horse-whipped to near total collapse and death) decided to unhitch them from the wagon.

Who owns that horse? There are a bunch of owners, breeders, really. They run the Central Bank Stables and breed race horses as well as draft horses.

The other horse in the team, yoked to the CB Stables stallion, isn’t a horse they own. She’s a filly that they train, on account of the fact that they’re trainers and jockeys too.

Either way, that other horse, because she can be bred for huge fees on account of her foals being worth a lot in the future, has to be taken care of too. Kind of like breeding “futures” you might imagine. Futures of wealth for the silent partners who actually control the goings-on at the CB Stables; yeah, those guys.

As it turns out, the wagon is stuck, and the team of horses has gotten ahead of themselves.

No one would ever advocate cruelty to animals, so they were cheered on by most people, even though most people were cheering grudgingly.

But here’s the rub. They’re a team, you know. And you can’t hope the breeder’s horse drops dead and the filly gets to run wild. They’re yoked together. (Did I say that?) So if you want the filly to have a life, you have to go along with keeping the other horse alive.

At some point, the wagon is going to have to get hitched back up to the pulling horses, or it ain’t going nowhere.

From above the trees, I see that wagon, which was holding its ground on the slope it was abandoned on, starting to slip. Did I say it was one big, heavy wagon?

Oh, I forgot one thing. That’s because I almost couldn’t see clear to the ground because of all those trees. But there’s a long, very long, set of reins that still connects the wagon and the horses.

As that wagon starts to slip backwards, it won’t matter how healthy those horses look and how far they’ve gone ahead of their heavy load. They’re going to get yanked back, reined-in, and maybe broken.

You don’t think so?

Have you seen what’s weighing down the wagon? Haven’t you seen it starting to slip?

The economy here in the U.S. looks like an old nag is pulling our giant rickety wagon.
Unemployment is at 8.3%. Real estate prices have been up in some areas. Up? Up is relative. Like The Doors sang, “I’ve been down so goddamned long, it looks like up to me.” Foreclosures this month are up 6%, according to RealtyTrac. Consumers aren’t spending, and what they’re buying, they’re back to buying on credit. Savings rates are back to non-existent levels. And we’re facing that fiscal cliff thing.

How bad is the fiscal cliff?

First of all, people, it is real and it is not going to be addressed on any long-term basis. We will go to the edge of the cliff, look over, lose our national footing, and be saved (hopefully) by a last-minute, temporary “fix,” which will be too little too late.

Want to know what’s going to happen to our wagon then? Just look across the pond at Europe. That’s where we’re heading.

The U.K.’s (great Olympics, you lads and lassies!) industrial production numbers are now the worst in 20 years. At 97.3, they are down 2.5% from May to June. Their economy continued to contract through July. That makes three consecutive quarterly declines. Two quarterly declines in a row constitute a recession.

Italian GDP was down 0.7% in the second quarter after falling 0.8% in the first quarter. Year over year growth is down 2.5%. Italy is experiencing its fourth consecutive quarter of negative GDP growth. And about those bond yields… they’re going to sink the country.

Germany, you know, the biggest economy in Europe, saw industrial production dip 0.9% in June, erasing some of the 1.7% upside they saw in May. Year over year IP is down 0.3%, and German government officials are saying they’re seeing “growing signs of decline.”

Spain? Oh, things there are just peachy. Spain, the Continent’s fourth-biggest economy (Germany is 1, France is 2, Italy is 3, Spain is 4, and the Netherlands is 5) just notched its tenth month in a row of declining industrial production.

The Netherlands just announced IP fell 0.6% in June, from a lackluster May.

Greece? We won’t even go there.

China? Slipping into darkness.

So, how did those horses get so far ahead? Oh yeah, that would be by manipulation. The same kind of manipulation that China, the ECB, and the Fed are ratcheting up again.

Can those horses break free of the reins that bind them to reality (it’s the economy, stupid) and run wild?


Just don’t lose sight of the reality that it’s the economy, stupid.

… Did I already say that?


What Really Happened at Knight Capital

32 | By Shah Gilani

Oh, you are going to love this.

That whole Knight Capital fiasco on Wednesday, when a software glitch caused them to flood the market with thousands of unintended orders, it ain’t exactly what you think it is.

Sure, they tripped over themselves in the dark pool where they were trying to compete.

But somewhat interestingly (okay, a LOT interestingly), the competitor that drove them to “upgrade” their trading software, which malfunctioned and caused them to actually bid-up share prices erroneously and then buy them at inflated prices, was none other than, wait for it…

The New York Stock Exchange.

That’s not the whole story, or even the good part. Oh, it gets better. A lot better.

Knight claimed a $440 million trading loss on Wednesday resulted from their computer glitches and sunk the company (at least for now; I’ll get to that).

Well, according to Nasdaq (this was on its site:, it wasn’t a trading loss at all. Knight paid Goldman Sachs a $440 million fee (commission?) to take the errant shares Knight had bought on Wednesday morning off its hands.

Now, I don’t know what Goldman did with those shares, but my guess is they held most of them and sold them on Friday when the market soared a few hundred points. Of course, that’s not a “prop” trade. Knight is a customer of Goldman’s (it is now…).

But who cares?

Goldman Sachs ripped a customer for a $440 million fee, virtually bankrupting it in the process, flipped the shares it bought from Knight to “help” them (and first of all, probably overly hedged itself… as in enough to be net short… the large stake it holds in Knight’s convertible preferred) for a tidy profit, and then probably shorted the stock (before “helping” them, and themselves to their little fee) before the stock collapsed, then probably gave it its “lifeline” (that’s a guess, and I’m being sarcastic, but it’s possible). And maybe we’ll find out where that lifeline Knight got on Friday really came from) before buying a ton of Knight’s shares back on Friday before hearing (of course… before) that several big firms were looking at buying Knight.

What’s my point in the above LONG sentence? Who cares! That’s all business as usual at the Golden Vampire Sachs.

That’s after-the-fact stuff.

What’s more interesting is why all this happened in the first place.

Here’s what you probably don’t know…

Back in July, the NYSE got permission (from the SEC… oh, those guys are good) for a one-year pilot program. The name of the program is… wait for it… the “Retail Liquidity Program.”

Are you laughing? You will be.

The Retail Liquidity Program allows the NYSE to transact on the exchange (its Exchange), for the benefit of retail customers only, at better than posted prices.

That’s right. If you’re a retail investor and you buy or sell a stock on the NYSE, you might get a price better than the bid, if you’re selling, and a price better then the offer, if you’re buying.

Mind you, it’s not much. Maybe one-tenth of a cent. But hey, you know, on your 100 share orders, that adds up to a lot of money. Maybe now you can afford that Rolls Royce.

You didn’t know that, did you? And why should you? You wouldn’t because YOU don’t transact on the NYSE. YOU don’t send your orders anywhere.

Here’s what’s happening behind the scenes…

When you place an order with, say, TD Ameritrade, or Scottrade, or Fidelity, or E*Trade (these are all customers of Knight Capital; I’m getting to that), they “route” your orders to be executed against bids and offers elsewhere. Those bids and offers may be on the NYSE, at some bank (maybe Goldman Sachs), on some market-maker’s trading desk (like Knight Capital’s desk… they’re a market-maker, you know), or in some dark pool, or at some other hole in the system where trades slip into darkness.

Your broker routes your trade for execution to some destination, because he is paid to send it there. That’s right; your broker is paid to send your order somewhere, and if it’s an NYSE-listed stock, it probably won’t even be sent to the NYSE.

That’s because the NYSE doesn’t pay for “order flow.” Oh, wait a minute…

They do now.

Under their Retail Liquidity Program, they can now pay for order flow, kind of. They get orders directed to them by offering a slightly better price on an execution than is posted on their own Exchange.

The idea is that they can’t compete with companies like Knight, who pay for order flow (so it never gets to the NYSE) and take the other side of trades or match them off against other order flow in their systems, or other people’s systems.

I know this is a little confusing. But here’s what you need to know.

This whole “paying for order flow” thing is about collecting as many orders as you can get under your roof. The more orders you see coming your way, the better you know what the bids and offers are out there, the better you can “predict” prices, and the more profitable your trading will be… that is… if you’re high frequency trader, or a market-maker… like Knight.

So, the NYSE gets to compete with Knight. And Knight doesn’t like that. So, it upgrades its software to jump the NYSE. And it blows up.

Knight’s systems (probably “pinging” and looking to influence market prices and initiate trades) sends out orders (I’m speculating here), which end up lifting bids, which ends up triggering Knight to buy shares, which ends up being a huge cluster you-know-what, because it’s all a mistake, you know. Which means they own a bunch of stocks they don’t have enough capital to hold. Which means Goldman Sachs gets to bend another customer over.

Which means everything is normal on the Street.

I can’t wait for Monday.

You just can’t make this stuff up.


Q&A: August 2012

1 | By Shah Gilani

I got hundreds of questions and comments this month from you about my stance on regulations. Let’s see why.

Q: I agree with you on the need for some regulations. However, they must be simple and clear… How would you write the regs? ~ Cory B.

A: Cory, all the regs I would write would be one-liners. That’s no joke.

Q: What we need is a hammer. Not the kind carpenters use, but a judicial hammer which treats serious crime seriously. No more civil trials for criminal offenses, such as the debacle surrounding Richard Fuld. These thugs know how to weigh odds, and most of them will gladly risk 15 months in a white-collar prison at hard tennis for, say, a few million in ill-gotten gains. You can’t fix fraud, but you should be able to make the punishment so severe that only the dumbest of the dumb would give it a try. ~ Ron S.

A: That’s what I’ve been saying. How come so many of you say it so much better than me? I’m always learning from you all.

Q: To put faith in regulation and the regulators is to assume they can’t be bought. They can always be bought. Whaddya gonna do? Reform the existing corrupted agencies? Get rid of the Gensler/Goldman-run CFTC and replace it with something else? And who would run that? Somebody from JPMorgan? ~ fallingman

A: I want teachers (grade school and junior and senior high school teachers) to be our regulators. They obviously aren’t about the money and they obviously are civic and civil minded. Why not?

Q: Who is going to put the “black and white” rules in place, the regulators? lol! Regulators are currently paid by the banks they regulate, umm, but, isn’t that a conflict of interest, or, am I just stupid?~ Domina L.

A: Stupid is as stupid does. If we go back to the way regulators regulate, we’re all stupid. We need a new breed of regulators. Expecting that we’ll ever get them to come down from Olympus is proof that I am stupid. But a boy can dream, can’t he?

Q [re: Let’s Give Regulations Force and Power]: I agree that mobetter laws and regulations need to be written, but first the existing laws and regulations need to be eliminated. Then the new laws and regulations need to be written by someone who is not a lawyer or politician. ~ Ricky

A: Get me those teachers… it’s summer, they aren’t doing anything. Well, that’s not exactly true. That beautiful teacher creature, you know who you are, who I just met at PJ Clarke’s in NYC, is working on her tan at the beach.

Q: What we really need are leaders and regulators with real intelligence (not just political savvy) and most of all a very large dose of character – know of any? ~ Bruce M.

A: Yeah, but they’re all dead. Read “Team of Rivals.” Abraham Lincoln was so amazing; he was exactly what a politician should be. He and George Washington should be every man’s high water mark as far as character, integrity, honesty, sensibility, temperament, and leadership. We should always be looking for another Washington and Lincoln. They’re out there. Please stand up, gentlemen, and come lead us.

Q: Any government regulation in finance/economics is anathema, and is what got us into trouble in the first place. Total responsibility of each and every one of us, whether business or finance or whatever people, is an absolute necessity for a free society. And so is laissez-faire capitalism. Government is the use of force, and that use is never appropriate other than self-protection, or protection of our nation, states and municipalities. ~ Anne K.

A: Oh Anne, if only! You are a hopeless romantic, I know, because I dream the same way you do. Only, I woke up.

On account of the fact that personal responsibility is anathema to so many people, we will always need walls and bridges, such as regulations are, such as governments are, to protect us from our bad, irresponsible neighbors. Remember, good fences make good neighbors. And, “once I dreamed I was in a Hollywood movie, and I was the star of the movie.”

Q [re: Republicans and Democrats Have it Wrong]: One thing I miss completely in your post is the notion of individual responsibility. Did anyone *force* all those millions of people to use their houses like ATMs, take on the “liar loans,” and in general act financially irresponsibly? Did anyone *force* millions of people to keep voting for politicians who put in place laws like the CRA which didn’t just incent but, at the risk of nasty examinations by government agencies, practically force many banks to make too-risky loans? ~ Patrick

A: Perhaps you’ll agree with me, Patrick, that “force” is a force in and of itself. It manifests itself through individuals and very often through the masses as though they are one. But, just as we can’t force individual responsibility on anyone (kind of wish we didn’t have to), we can’t expect that the force of popular delusions would ever be derailed by group responsibility.

I am saying that the human condition is such that, while we are all individually responsible for our actions, outside forces can – and do – corrupt us by infusing us with an acceptance of what others deem acceptable. If you can figure out how to make individuals responsible for everything they do and say -and I mean responsible to the point that compassionate, objective thoughtfulness always precedes action – we wouldn’t have to wonder if there is a heaven. In the meantime, all we can do is be “cause in the matter” and lead by example… or try.

Q: Shah, I can’t give you enough credit for taking this position on regulation, even though it is not a popular one among conservatives. You are breath of fresh air among the writers I subscribe to. This point is something they never talk about. It’s always all of these platitudes about getting the government out of the way of big business. I would like the government out of the way, too, out of big business and out of my business, but the fact is that almost every day there is a new story about fraud. Human nature is not going to change, and with today’s technology, there are almost an infinite number of ways to rip off the unsuspecting. ~ Charles

A: Thanks Charles. Because it is what it is, the best we can hope for is mobetter regulations.

Q: OK, I’m a dreamer… But, what if compliance with government regulation was a business option and purchasing government compliant products was a buyer’s choice? Vendors could choose to offer products that were “Government Approved” in the same sense you see “UL Approved” for appliances. Businesses seek the blessing of research and ratings organizations such as the “Good Housekeeping” Seal of Approval, good ratings in “Consumer Reports,” the Consumers Union, etc. Let the buyer beware. Some would choose the “safety” of government approval, and others would be persuaded by vendors who claim to design products and services “better than government approved.” Then, government regulation would stand the pressures of market competition… and that would seem to be a good thing. ~ John W.

A: John, I love you man, but go back to sleep and dream another dream; your last one is a nightmare.

Q: Though I don’t disagree that there needs to be a fairly limited number of “rules” (to dissuade people from doing things that are wrong (eg: fraud, theft, extortion, bribery, etc.), I don’t think it will ever be effective unless the enforcers are held accountable. ~ Mark D.

A: Mark, you are ABSOLUTELY right!

Q [re: The Woes of Regulation]: Shah, your tongue is firmly planted in your cheek. Your ability to put levity with a sad tale is a sure sign of your own insanity. HA HA ~ Larry

A: You calling me insane, Larry? So, you know me!

Q: Think of banks as public utilities who provide financial services. Electricity, gas, water, sewer, telephone, television, radio, etc. are all regulated, I see no reason for banks not to be controlled by the some level of government. ~ Don.

A: 100% agree!

Q: I am wondering where the “fines” that are collected go. Is that for the buddies at the SEC? ~ Robert O.

A: All the regulators go out to dinner with the collected money and get so drunk that they end up back at work the next day doing the same good job they always do.

Q: Is Evil winning the war against the Good? ~ Luis G.

A: In some quarters, yes.

Q [re: Glass Stegall is a Dream Worth Revisiting]: Is [Sandy] Weill for “real” or is this another “sham” with ulterior (self-enhancing) motives? ~ Jeff A.

A: I believe him. He’s a good man. Sure, he got a little too into his behemoth building, but hey, he was the master builder and the best at it, maybe ever.

Q: Hmmm… Sounds like a death-bed conversion, welcome but always to be taken with a large grain of salt. ~ Alan H.

A: A conversion is a conversion is a conversion. Who cares when it comes, just bring it on.

Q: With G-S Act back in place, businesses could plan and borrow from their Vanilla Bank while the Casino “Banking” trader teams can legitimately play the odds but with their own money facing whatever the consequences. ~ Harry B.

A: Yep, it is just that simple.

Now let’s move on to some of your other questions and comments.

Q [re: Central Banks are the Problem]: Central banks going away? After the hundreds of years of sucking up wealth, there is nothing that exists on this planet that the central banks do not own, including you and me and all the war-making and policing power they need to keep what they own. ~ Glen H.

A: Ouch. I would say that’s harsh, if it wasn’t somewhat true. But the central banks don’t own us; it’s more that they are the backstop and launch vehicles for their constituents, the banks they serve like indentured servants, who we are indentured to.

If you want to stop the snake from strangling you, but you can’t because it’s too tightly wrapped around you, you cut off its head.

Q: Banks need to get back to the business of helping build strong communities instead of manipulating the markets for their gains. ~ Mike

A: You’re right. And it is just that simple. How come it takes me so long to say the same thing? Thanks, Mike.

Q: I believe the only solution that nobody talks about is: Nationalize all the big banks and central banks making the governments the direct owners which means the taxpayers will be owners. Secondly put all top management personnel of these institutions under civil servant rules, which means fixed salary fixed perks and lots of supervision by state plus nice jail times with hard labor whenever you do criminal things. It will make banks lethargic but take out all these Casino activities that they engage in. Now are you with me? ~ KJS

A: Sorry KJS, I can’t agree with your main premise, that banks should be nationalized. We need innovation and entrepreneurship behind our banks. Civil servants running the banks? Are you offering the downtrodden postal workers of America new jobs? Or the folks at the DMV? You are too kind.

No, I’m for free enterprise, just not a free-for-all. Break up all the TBTF banks, limit their size, and treat them like we treat the utilities that are the backbone of America. As far as your other ideas on what to do with criminals… you had me at hello.

Q: Without any serious effort to curb spending at the federal level it’s all p*ssing into the wind. I am afraid that it will ALL have to crash and burn. Corrections happen and all the Fed’s horses and all the Fed’s men will be too busy getting re-elected to notice that Humpty has already started to fall. ~ Steve

A: He’s already fallen, Steve. “Help, I’ve fallen and I can’t get up!” Where’s that life alert button when you need it? It’s just a matter of time before the markets fall off the matchstick wall they rest on. It used to be the economy falls and markets followed quickly, or markets would discount the coming fall in the economy and lead it down. Now the relationship between the two is so manipulated, you have to actually be behind the curtain to know that the levers are grasped by some pretty greasy hands. It’s all a game now.

Q: Could you do a write up on the HSBC scandal? I think this is even bigger than Barclays/Libor. We now have two of the few banks which came through the crisis without needing a bailout, being found guilty of the sorts of criminal behavior which would make them (for major institutions) “the bank you must not bank with.” Surely this will lead to deposits be pulled and banking arrangements terminated, i.e., a bank run. What do you think? ~ Alexandra C.

A: Alexandra, I’m working on it. It’s really a sordid tale and would make one helluva movie, but it would have to be rated XXX. I’ll come up with the R-rated version for you folks shortly.

Q: What Wall Street folk need a code of honor that resides within their very souls and which directs them toward the greater good without the need for government regulation. Their existing code can be summed up in this corrupted Boy Scout type of motto:

On my honor I’ll do my best,

To help myself

And screw the rest. ~ Gary S.

A: They actually have a code, you know that: “Greed is good.” It’s in their souls and directs them. It’s all “good,” you know!

Q: The “depression” was bad, but it only lasted three to four years. All the excess was blown off, and the economy cleaned out and took off. Our “slow growth” and deficits have lasted six years already, and are getting worse. The working man is the slave to the rich puppet masters who make nothing… they just move paper around. Dump Bernanke… dump the Fed. Bring on the depression. Let’s get it over with and start over! ~ Robert

A: You totally get it. Now help me spread the message: Free the Free Market!

Q: Wall Street’s motto should be “Crime Pays!” ~ Dave F.

A: It already is, was, and has been, Dave.

Q: The financial services have become a parasite on society as a whole, and they will not stop until the host collapses, at which time they will die as well, and hopefully there will be an opportunity to pick up some pieces and try to get things working again. In the meanwhile, they are in essentially complete control of the power leaders of both political parties, and any hope that we can bring them back under control by political means is a pipe dream. We are trapped on this runaway train, and all we can do is brace for the crash. ~ Gordon F.

A: “Old Charlie stole the handle, and the train, it won’t slow down,” sang Ian Anderson of Jethro Tull fame.

Maybe you’re right. After the crash we can pick up the pieces and start again, and get it right. Okay, you know what I say at times like this… “Good luck with that!”

People like making money without working, by creating paper games to play on their computers, where the paper (securities) is ultimately money. After the crash everything will go back to normal, the new normal, which is where we already are, which is abnormal. Welcome to the Matrix. You’re in the game, and it ain’t ever changing, so you might as well learn the rules, break them and make some money for yourself. Make that runaway train the gravy train, that’s the one I ride. All aboard!

Q: Shah, I assume you are a very busy individual, but if you have not read the book “The Creature from Jekyll Island,” by Edward Griffin, I politely urge you to read it immediately. What you call the Matrix is actually very documented in this book. I couldn’t put it down once I started reading it. Not because I had found a delightful book but because each sentence disgusted me, horrified me and revealed truths that are cleverly hidden from the masses. Truths that are now springing leaks into the public but the Matrix is absolutely all encompassing in our civilization at this point.~ Eric T.

A: Eric, thank you, we’re on the same wavelength. I just finished “Team of Rivals,” the masterwork, seminal book about Lincoln, his honesty, integrity, genius, politics and how America should be lead. I highly recommend it, it’s absolutely brilliantly written by Doris Kearns Goodwin.

And I just picked up “The Creature…” I am already spellbound and I haven’t even gotten to the first chapter! My bad is that I haven’t read it before. Like “Team of Rivals,” I’m sure it will open up vistas to how things got to be the way they are and maybe show us how to change our destiny, as Lincoln led us to see ourselves and what America stands for. Thanks for the recommendation; I’m passing it on to all your fellow WSII readers, too.

Q: Wow, how right you are… I’ve read your stuff a long time now, and damn it, I wish I had said it all as you are one smart cookie with whom I seem to always agree. Are we related ? ~ Jay C.

A: Probably twin sons of different mothers, I reckon, Jay.

Q [re: Our Pension Fund Scheme is Unsustainable]: When we get into hyperinflation (which is quite likely based on history- and is the cruelest form of regressive tax) – these big pension payouts won’t be worth zilch. ~ Chicken Little

A: The sky is falling… you know that, thanks for pointing it out. Someone pass me that bottle.

Q: You can outlaw the hedge funds and create laws to prevent any more banking collapses, which would make the fraud seem to be a little more out in the open. ~ Tom T.

A: Hedge funds aren’t the problem, never have been. It’s banks that rob us blind.

Q: Could you explain what a prop trade is and why it is illegal and its ramifications in something like a “prop trading for dummies” type of explanation? ~ Peter S.

A: Sure. “Prop” is short for proprietary. Proprietary trading is trading with the firm’s money, not your own, and not a client’s money who has asked you to make a trade with his money (that’s an agency trade). Of course, prop trading at banks means, more often than not, your trading capital includes depositors’ money. Prop trading is not illegal. The problem is that when banks prop trade, their risk-taking may result in losses that wipe out their capital and eat into their depositors’ funds.

Q: I am a happily married 59 year old woman, even so, this morning I sure enjoyed looking at this picture of you, Shah. Wow, if only I could be 30 again. ~ Penny

A: Yes, I am blushing, Penny. If only I could be happily married I’d feel like 30 again myself!