Archive for January, 2014

An Inside Look At Operation Choke Point…

16 | By Shah Gilani

As if banks aren’t choking us enough…

The Justice Department says lots of hard-pressed borrowers – the ones that too often have to rely on payday lenders – are gagging.

The DOJ (the Department of Justice – but not always “just” itself) has sent out over 50 subpoenas to third-party payment processors and banks as part of its latest investigation, which they’re calling Operation Choke Point.

Apparently, some payday lenders and crooked Internet merchants are having their third-party payment processors simply take money out of customers’ bank accounts.

The payment processors have legitimate relationships and accounts at big and small banks. Sometimes a payday lender or an Internet merchant is given authorization to withdraw monies from borrower’s account… and sometimes they aren’t.

The problem is that under the Bank Secrecy Act banks must monitor account activity of their customers businesses and businesses’ customers if they have accounts at that particular bank.

But, many banks apparently turn a blind eye to third-party withdrawals, for a number of reasons.

Sometimes, they just believe that the payment processors have a right to take money out of accounts.

And, I know this will surprise you… Sometimes the banks know there’s something very wrong, yet they let monies be withdrawn anyway.

If account holders complain and are legally entitled to get their withdrawn money back, the banks are only too happy to comply.

Why are they happy?

Because they charge the account holder a fat fee to put the money (which they get from the third-party processor… who, in turn, gets it back from the payday lender) back into the account.

In fact, banks get more money from those fees than they get from payment processor fees paid to the bank. It’s just business.

How bad is the problem?

One bank, Four Oaks Bank of Four Oaks, North Carolina, has tentatively agreed to pay $1.2 million to settle its part in processing payments on behalf of crooked merchants and payday lenders (many of whom operate illegally in states that have outlawed them) who illegally withdrew $2.4 billion from Four Oaks and other banks. That’s one bank doing this to the tune of $2.4 billion. Can you imagine that?

That’s not turning a blind eye; that’s bank fraud. And they get a slap on the wrist?

Do any of you have first-hand experience or know of anybody who has had money illegally withdrawn from their bank account? Please share your stories here.

I’ll keep watching this investigation and where it ultimately goes, and I will follow up.

On another note…

The market selloff last week was a little disconcerting. I’m still very bullish. But we’re not going to go straight up. There are some macro headwinds as well as domestic slippery slopes we’re trudging up.

Frankly, even though a lot of big-time analysts and billionaire investors say the shadow banking problem in China isn’t a real or big enough problem to worry about… and that the Chinese government has plenty of wherewithal to easily deal with it… I don’t buy it.

And you shouldn’t either.

China is now the tail wagging the dog, and that doggie is the world. If China is struck with a full-blown banking crisis, which leads to a credit crisis, it will upend global markets.

Are we facing another possible “Lehman moment?” We could be; it really is that bad.

China has gotten so big and its banking sector (especially its shadow banking realm) so monstrously over-leveraged that if the government doesn’t step in very soon and create a fix to what could blow up, we could be in for a very, very scary time ahead.

Here’s a short understanding of what’s going on that I wrote for Forbes on Friday.

You’ll want to have a plan to protect your stock positions and capital in the event China’s shadow banking problem casts its ugly spell around the globe.

Over the next several weeks, I’ll be sharing my plan with you right here in these pages. 

So keep a look out.

As Promised, We Decode The Big Banks

19 | By Shah Gilani

On Jan. 14, I told you we would be closely watching one of the most significant events of the year:

This event, I predicted, could single-handily determine whether our economy is heading for a major upswing… or is about to fall into a downward spiral.

I’m talking about the Big Banks’ fourth-quarter earnings reports.

Well, they’re out…

And I’ve spent the last several days examining every detail to try to determine what this means for your money.

And today, I want to share the findings…

So let’s have a look at the Big Banks earnings… and see what kind of year emerges.


JPMorgan Chase is the biggest bank in the U.S., measured by assets. It used to be the most profitable, but it just ceded that position to Wells Fargo.

JPM’s Q4 earnings tumbled 7.3%. Net earnings were $5.28B or $1.30 per share. For all of 2013 net profits fell 16% to $17.9B. By comparison Wells posted full year net earnings of $21.9B.

But don’t cry for Chairman and CEO Jamie Dimon or his JPM money making machine.

Yes, it was a bad year for the criminal enterprising bank. After all, they paid about $20 billion in the past 12 months in government investigation settlements — including $13 billion for mortgage related legacy stuff and $2.6 billion to settle turning a blind eye to Bernie Madoff’s little scheme.

Yet, wisely the bank had set aside a “litigation” kitty – with a total of $9.3 billion in Q3 and another $858 million in Q4;

So, even after all those settlement costs, net revenue for Q4 was still $24.1B, down only 1.1%. The other good news for the bank was that expenses were 3.3% lower in Q4 than they were in Q4 of 2012.

What about automobile and mortgage loans?

Well, auto originations were up 16% to $6.4B (although we don’t know the breakdown of those loans in terms of subprime or prime – meaning we don’t know how risky they are.)

And while mortgage originations crashed in Q4, tumbling 54% to $23.3B, as fate would have it, profits in the unit were up 34%. Why? Because of fewer soured mortgages and lower loan loss provisioning.

Meanwhile, investment banking revenue fell 21% to $6.02B and profits fell 57% with an FVA charge of $1.5B. FVA stands for funding valuation adjustment, which happened because the bank had to adjust funding costs to carry its derivatives contracts to show the present value of those costs as opposed to spreading the costs out over the life of the contracts.

Excluding the FVA, IB profits were down 11%.

The bright spot — which is the bright spot on all the info we’re going to examine today (and which tells us several important things that I’m going to share with you in a minute) is that the bank’s wealth management business saw client assets rise 12% to $2.3 trillion. Private banking revenue rose 11%.


Now, let’s move on to Citigroup, the nation’s third largest bank by assets.

They had a similarly horrible Q4 in terms of mortgage origination. The sixth largest mortgage originator in the country saw business fall by 51% relative to Q4 in 2012 — and now Citi is laying off 950 mortgage workers.

Citi’s Q4 numbers came up short of analysts’ estimates even after analysts (with management’s subtle guidance) reduced their estimates for six weeks in a row preceding the earnings announcement.

While net income doubled to $2.69B, results were weighed down by a $2.3B hit for legal charges and costs related to layoffs.

The good news for Citi was that adjusted Q4 net was up 20% year-over-year and expenses were down 4%. For consumers the good news was loans were up 7%. Year-over-year legal costs were down 37% in Q4 relative to Q4 2012, though at $809 million they were up 19% from Q3 of 2013.

The bad news, besides falling mortgage originations was fixed income, commodities and currencies (FCCI) trading revenues were down 15% YOY and down 16% from Q3 2013.

Again good news came from setting aside fewer reserves for bad loans and soured assets, which the bank reduced by half from a year ago. The bank has been shrinking its assets; they fell 2.8%; and they’re increasing their Tier 1 capital ratio, which is now at 10.5%, up from 8.7% a year ago.


Bank of America, not surprisingly, saw mortgage originations drop 49% to $11.6B. As a result they are reducing their mortgage personnel head count.

BOA had Q4 net income of $3.4B or $0.29 per share as opposed to net of $732 million and $0.03 per share a year ago. But 13 cents of those 29 cents came from releasing $1.2B in loan loss reserves. In other words they said we are going to assume we won’t need those reserves any longer and we’re putting that money into the earnings bucket.

The bank also enjoyed a one-time $500 million tax benefit in the quarter, which brought its tax rate down to 10.4%. Management says 2014 could be back up around 30%.

Global wealth and investment management saw a record quarter, earning $3B as opposed to $777 million a year ago.

Last year BOA bought back $500 million worth of its own stock and is going to continue buybacks in 2014.


Wells Fargo, the new profit leader in the big bank leagues, saw Q4 earnings jump 10% and full year net earnings of $21.9B, as opposed to JPM’s full year total of $17.9B.
Still, Wells with $1.5 trillion in assets is dwarfed by JPM’s $2.4 trillion asset book.

Wells earned $5.6B in the quarter or $1.00 per share. That’s up from $5.1B and $.91 a share in Q4 2012. Full year revenue was up a solid 16% over 2012.

Wells is the nations’ largest mortgage originator, accounting for 1 in 5 mortgages made. Its size in that business didn’t make it immune from the tumbling dice.

In the quarter, Wells earned $1.6B from mortgage banking as opposed to $3.1B in Q4 of 2012. Mortgage revenue fell from $152B in Q4 2012 to $65B in Q4 2013.

Wells also set aside a lot less in Q4 for future losses, sidelining $2.3B as opposed to the $7.2B they set aside in Q4 of 2012.

Now let’s take a look at the former investment banks (masquerading as commercial banks.)


Morgan Stanley’s stock was up 64% in 2013, the most of all the big banks.

Too bad it didn’t have such a good Q4. Net fell to $181 million from $594 million a year ago. Part of what hurt the bank was setting aside another $1.2B for litigation reserves related to mortgage backed securities.

But revenue was up to $8.2B from $7.47 a year before.

The bright spot for Morgan Stanley was its growing deposit base from its brokerage business, which they can use to make loans — not to you and me – but to other banks and private equity companies and big corporate and institutional borrowers.

After all Morgan Stanley is an investment bank not a commercial bank, despite the fact that it’s owned by a bank holding company that begged the Fed to let it become a commercial bank just so it could survive off Fed liquidity after the 2008 credit crisis.

(The exact truth holds for Goldman Sachs, which also got its BHC (Bank Holding Company) allowance on the same Sunday in October 2008 so on Monday they wouldn’t be out of business. But whatever, they’re banks…NOT.)

Anyway, the bank is aiming to loan 70% of their “deposits” in 2014 as opposed to about 22% in 2012.

If they don’t lend to deadbeats that should be good news ahead.

Investment banking revenue was up 11% as the number 3 underwriter in 2013 became the number 2 bank in mergers and acquisitions.

Asset management saw a pretax gain of $337 million as opposed to net of $221 in Q4 2012 as the global upswing in equities helped fee-based wealth management revenues.


Goldman Sachs, the other cowardly investment bank masquerading as an FDIC ward and Fed favorite, saw its Q4 net fall19% on muted trading results and in-spite of a billion dollars in expense savings. Sure earnings beat expectations, which had been lowered.

But investors still hit the stock 2.2% as soon as the earnings came out.

Net for the quarter was $2.33B or $4.60 a share, down from $2.89B or $5.60 a share a year ago. Revenue collapsed from $8.78B in Q4 2012 to $4.9B in Q4 2013. Analysts had expected revenue of $7.71B and net of $4.22.

It was Goldman’s worst year for FICC since 2008. For the year the firm earned $8.65B, off 13% from a year ago as it doubled net provisions for legal and regulatory proceedings in the quarter to $561 million from $260 million a year ago.

Investment banking revenue was up 22% to $1.72B year-over-year, and up a healthy 47% from Q3 2013. Equity underwriting jumped, doubling in the quarter from 2012. And M&A fees rose 15%.

Employee expenses were down 3% to 37% of total revenues, as head count rose 2%.

Now Here’s The Takeaway…

So, what’s really going on at the nation’s mega banks?

Mortgage originations were down horribly in Q4 from a year ago, and down from Q3.

That says that the jump in mortgage rates, which are still hysterically — mean historically — low isn’t motivating borrowers. Sure refinances are down. They always go down when rates rise.

But what does the lack of originations say about home-buying?

It says this:

As we head into 2014 you want to keep your eyes very closely on housing.

Has the move to higher interest rates already been made? Is it over? Will there be mortgage money available for homebuyers to keep prices firm? With all the mortgage personnel layoffs… will banks be able to flush out mortgage seekers?

Will banks with big mortgage businesses see their earnings taper off? Will they resort to more trading before Volcker rules kick in? Will they lend more in a rising rate environment to make up for the easy money mortgages yield them?

What’s going to happen to the banks that rely heavily on FICC that are already seeing falloffs in trading revenues? What will Volcker rules do to them? Will they have to remake themselves?

What about the lack of lending and the emphasis on trading and investment banking and any other fee income other than lending income? Is that a function of lack of demand? If so, what is that telling us about economic growth? Are banks not keen to be lending into potentially rising rate environment? What does that say about where capital to grow the economy will come from?

And what about the growth in revenues from wealth management? They were huge across the board. How much of those gains came from high flying markets? What will happen if markets falter? Will banks suffer as their brokerage, wealth management customers and custody clients suffer, or panic if markets correct hard?

There are still a lot of questions to be asked based on what the big banks’ earnings are telling us.

What are we going to do about it? We’re going to make money getting ahead of the trends that are about to start unfolding.

I can promise you this: We’re going to look into the future and try and divine the trends.

And then we’re going to play them for profits. Big profits.

Stay tuned.


The Rock ’em Sock ’em Fed Comes Out Swinging

45 | By Shah Gilani

Last Tuesday, January 14, 2014, the Federal Reserve finally had enough.

After supposedly looking into big banks ownership of commodity-related infrastructure operations (like warehouses, oil barges, and utilities) for the last two years, which came on the heels of their 2003 review of the same issues, the rock ’em sock ’em Fed came out swinging.

Now, they said, they needed to look at “all aspects” of what they’ve been looking at for two years. That’s not because they were looking the other way before.

It’s because now they’re thinking big and asking themselves, “What would be the systemic risk to the system if a big bank owned something like the Deepwater Horizon (the BP well that blew out and cost almost $50 billion to date), or Japan’s Fukushima Daiichi nuclear power plant (which was destroyed by an earthquake-related tsunami and is costing god only knows how much) and the bank got sued, and their share price collapsed, and depositors fled, and that caused a run on other banks, and put the entire financial system at risk?”

Yep, it’s time for a study, they said. And because they are maybe thinking about some related rule changes, in maybe a year or two or three (these things take time, you know), they put out a request for comment. You and I have 60 days to submit ours, and so do the big banks.

But that’s not the “timing” part of this story…

The timing of the Fed’s announcement on Tuesday was just amazingly coincidental, a stroke of almost incalculable luck.

Here’s why…

Because the very next day, Wednesday January 15, 2014, at a hearing called by the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection, a few well-meaning senators got all huffy about banks having their greasy hands all over stuff related to commodities.

The subcommittee wanted to know why nothing has been done to stop a handful of big banks from ripping off businesses and consumers by manipulating (that’s code for jacking up) commodity prices by controlling “gateway” commodity-related infrastructure? Inquiring minds want to know!

Of course, the banks believe that because they own this stuff, they have a right to manipulate it because it’s a free market, after all, and if you own the stuff… well, you know.

How’s that for timing? The senators had a Federal Reserve bloke give testimony, which was part of the Fed’s amazing luck, because the fellow had nothing much to say. Except of course that they had just put out a notice that they were looking into it and were waiting for public comment before taking a couple of years to put their ideas for new rules down into some regulation ledger so it could go out for even more public comment.

As you can imagine, it was another productive subcommittee hearing.

What the senators kind of wanted to say (but didn’t) was that their brethren in Congress back in 1999, in a sweetheart deal of a law proudly named for the senators who put the whole thing together, maybe shouldn’t have allowed big banks to continue to own commodity infrastructure assets.

But that was probably an oversight in the otherwise great Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999), the final nail in the coffin of the old Glass-Steagall Act, and which famously ushered in the era of mega-giant Transformer Terminator banks, the 2008 credit crisis, and the ensuing Great Recession.

Maybe you remember, maybe you don’t. The good Senator Phil Gramm, from the ten-gallon hat state of Texas, retired from his hard work in 2002 after delivering the law to his banker friends. He then rode off into his sunset years to ply his retirement dreams of barely working for millions of dollars a year as vice chairman of the investment banking division of mega-giant Transformer Terminator Swiss bank UBS AG (NYSE:UBS).

Yeah, that UBS. The one that has had to pay millions of dollars in fines for manipulating mutual fund prices, for money laundering, and for helping thousands of U.S. citizens evade taxes. The same UBS that, in 2002 (note the year), acquired Enron’s energy trading assets. Yeah, that Enron, the bastion of corporate fraud and corruption that managed to hide billions in debt from its investors in the biggest accounting scandal in American history. The same Enron that included Wendy Gramm, wife of Senator Phil Gramm, on its board of directors. (If you want to read UBS’ full rap sheet, check this out:

You see, it’s all about timing.

So, is now the time for big banks to be forced out of their commodity manipulation and hijacking businesses?

Give me some time to think about that.


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More On My NLY Recommendation

29 | By Shah Gilani

Earlier this week I recommended buying Annaly Capital Management Inc. (NYSE:NLY). From now on, I’m going to offer you recommendations roughly once a month.

But let me make two things clear.

First, I’m not your financial advisor. I don’t know your financial situation and couldn’t possibly make “in the blind” investment decisions for you. I’m just telling you what I think about the market and recommending positions I think will be profitable.

Second, some will be very profitable… and some will be losers. That’s just the business.

Here’s what I want you to consider…

Whatever I recommend, always, always, always use your own judgment as to your comfort level taking any position. Never take a position where you could lose more than you can afford to lose.

What I suggest is that you consider putting no more than 5% of whatever trading or investing capital you have into any one recommendation. If you have $100,000 to play with, consider putting $5,000 into each recommended position. If you have $10,000, consider putting $500 into each recommendation.

That makes sense for two reasons: If you want to put on other positions, you’ll have available capital to do so. And you won’t ever lose too much on any one position.

Most often, I’m going to recommend you get out with maybe a 10% loss on losing positions, sometimes I might suggest a little more room to let the trade work.

So if I recommend a 10% stop-loss on a position, like I did with NLY, you’ll only lose 10% of your 5% investment. If you invested $500, that would be a $50 loss, or 1% of your total capital.

I can live with a 1% loss or even a 2% loss on any position. Make sure you can, too.

The object is simple here. We want to cut our losses and let our profitable trades run.

Of course you should consider your costs, like commissions, and whatever other trading costs you may incur. They are part of your profit and loss, or P&L.

Now back to my NLY recommendation. I suggested a 10% stop loss (personally I don’t like putting stop-loss orders down. I keep a mental note to get out where I have decided to get out, but then again I’m always watching the market. If you can keep mental stops, it’s a good idea. But if you need the discipline of a stop-loss order, do it!), so if the position drops 10% from where you got in, it’s time to get out.

I also said that in my Capital Wave Forecast, we might actually add to this position 10% lower. If we do, we would probably look at then getting out if NLY was to drop another 10% from there.

But there’s a big difference between my recommendations to you here and what we do at Capital Wave Forecast. There, we are looking at positions as part of a portfolio that we construct with core positions and more speculative positions, and we use options for additional income and to take outright leveraged positions. So we do a lot of positioning as part of an overall portfolio management philosophy.

I have very lofty goals for the Capital Wave Forecast portfolio in 2014, very lofty.

And I have lofty goals for the recommendations I make for you here, too. Just because you aren’t paying for these recommendations doesn’t mean I’m not 100% committed to making them hugely profitable for you. After all, besides caring, I have an ego. I want to be right, and being right is manifested in how well my recommendations do.

Now, I want to hear from you about what I’ve put up here and what you want from my recommendations. Please post your comments below.

Oh, and by the way… something slippery happened over at the Fed this week. And the very next day, there were Senate hearings that were directly related to what the Fed revealed on Tuesday. And you’ll never believe what happened. I’ll tell you all about it on Monday, so stay tuned.

Also, I’ll be digesting all the big bank earnings this week and get back to you on them next Thursday, maybe with a recommendation.



Coming This Week: One Of The Most Significant Events of 2014 (And It Could Bring You A Fortune)

22 | By Shah Gilani

The Big Banks are all going to be reporting their fourth quarter earnings this week.

Make no mistake: Although it’s only January, this will be one of the most significant events of the year…

You see, in the big picture, how the banks fare and what their future prospects are could single-handily determine the trajectory and breadth of the recovery we’ve been hoping for.

Even more, their “financials” could have major implications for your money.

Depending on what happens, it may be time to take profits if you own their stocks. It may even be a good time to selectively short the financials – and make a killing doing so.

Today, I’m going to share with you how I think the whole thing will play out.

Then, I’m going to give you a special bonus:

An opportunity to make a nifty profit off of the bank’s earnings announcement – including one of the fattest dividend payments you’ll see in your lifetime…


Almost all of Wall Street’s e Big Banks, JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup are trading at or very close to their post crisis highs, with Goldman Sachs being the only exception.

The “financials” have been front and center this whole rally.

The question now is, will their earnings — most of them have been posting record or near record numbers — continue to grow or will the Volcker Rule and approaching Basel rules and the new QM (qualified mortgage) rules dampen their earnings power?

As I said, when it comes to the economy, a lot rides on America’s banks.. Far too much in my opinion. These guys haven’t lost a beat since the financial crisis. They’re still here, and bigger and more frightening than ever. It’s sickening, but it is what it is.

You know exactly what I’m talking about…

Big banks are all about themselves. They’ll make as much money as they can by going where the fattest profits are commensurate with risk. No, wait a minute, forget that risk thing, it’s not really on their radar. As I was saying, the big banks go where they can win.

They can manipulate certain markets at certain times, so they go there. They can manipulate regulators, so they go there. They can manipulate Congress, so they go there. They can manipulate the economy, so they go there.

The question I have is, since they’re already “there,” as in everywhere, what boundaries are left for them to push? I mean, where are they going to go next to make their outsized earnings?

Don’t worry about them. Wherever they have to go, they’ll find their way there.

And, regardless, I’m not worried about the banks. I’m worried about the economy. Specifically, the juice necessary to grow the economy.

That’s where the banks come in. So, here’s what I’m looking at in term of their upcoming earnings report:

I want to see through all of them to see where they’re making their money and whether revenue trends in their most lucrative areas are rising, steady, or falling?

Personally I like “falling.” Why? Because if banks aren’t making as much at trading eventually — and sooner rather than later — they may actually ramp up consumer loans and small business loans and make more credit available to more people.

That would be good for the economy.

I’m not talking about sloppy lending. I’m talking about making more loans at less cost to folks with decent credit to buy homes and apartments and furnish them and start businesses and employ people and get this economy back on the entrepreneurial track the middle class has been shoved off of.

That can’t happen without banks bending over backwards to make money and credit available.

We’ll know by the end of the week exactly how this will play out, and I’ll get back to you with my next move.

In the meantime, here’s my recommendation:

It’s a mortgage REIT that I like a lot. A play I’ve also given to my Capital Wave Forecast subscribers. I don’t think they’ll mind if I share the recommendation with you here.

Keep in mind, recommendations made to my Capital Wave subscribers are made as part of an overall portfolio of positions we hold and trade in and out of.

But, on its own I still really like this pick. It’s Annaly Capital Management, Inc. (NYSE: NLY).

I like this mortgage REIT for several reasons. First and foremost it’s been hit hard as interest rates have risen. It’s a “bottom-feeding” play for us. Meaning it’s trading down at its 52-week lows and we’re playing it for a bounce.

At today’s price of $10.32 the dividend yield on NLY is presently 12%. You heard me: 12%. The price earnings multiple is very low; 2.99 according to Yahoo Finance.

But here’s the thing:

I don’t think rates are going to spike into the atmosphere. In fact, if fourth quarter GDP numbers are a negative surprise and jobs growth as measured by last Friday’s pathetic count, continues to be weak, and if the big banks earnings this week are disappointing, I expect the Fed will be in no hurry to taper. And if they taper some, it wouldn’t surprise me if they stick to Treasury purchases but not their MBS purchases.

And that should bode very well for NLY’s stock price.

I see two ways of playing this:

1) Buy NLY and think about adding to your position 10% lower, and then using another 10% lower move as an exit point; or

2) Jump in for some hoped-for appreciation… or even just a nice 12% return! If the stock goes nowhere over the next 12 months, just get out. If it drops 10% from here, don’t add to your position.That’s the kind of play I like to share with my Capital Wave members. A fat dividend payer with appreciation potential and a 10% downside. Let me know how you do with this pick.

And let’s see how the banks do this week. Our NLY position might react to their earnings and we might look to take a position or two on some of those big banks.


[Editor’s Note: If you found Wall Street Insights and Indictments to be worth your while during 2013, Shah would really like to hear from you. We’re positioning products for the New Year, and we want to keep bringing you this guide to uncovering wealth – free of charge, of course. Let us know what you’d like to see this year. Every comment helps.]

Make One Tiny Adjustment Today… Get Rich in 2014

18 | By Shah Gilani

It’s natural to look back. We live in the past.

For most people, the future isn’t an unknown full of unlimited opportunity. It’s about hoping the bad stuff in our past isn’t a prelude to the future.

But what about the stock market? 2013 was a spectacular year, at least for stocks it was. And already people are afraid about the future. They’re afraid that after a great year for stocks, the bloom is off the rose.

Are people naturally pessimistic? Are they afraid of the market?

The answer to both of those questions is, unfortunately, “yes.”

I know because I used to be one of those people.

Not any more though, not for a long time. I make money in the markets because I’m not pessimistic. I make money because I’m optimistic, because I’m optimistic about making money.

The past is the past. I’ve had my share of bad stuff, some so bad that I can’t believe I made it out the other end, that I didn’t break down and give up… on life. But I realized a long time ago that it’s up to me. I decide what happens to me. And I learned that because I was being pessimistic, more bad things were happening to me.

When I realized I actually had a choice and the choice was all mine, I chose to be optimistic. I finally got it that the past wasn’t coming back. It was the past. And I wasn’t going to let it be my future.

That was the start of my success.

I’m talking about being successful in life. And that also means being financially successful.

Here’s the lesson…

There’s money to be made trading markets – trading any of them or all of them. And it’s impossible to be a successful trader or investor if you’re pessimistic.

Sure, we all get down when we lose money.

Here’s the difference between being a pessimist and an optimist. A pessimist thinks the past is his future. An optimist looks at the past, specifically our losses and our failures, and learns from them. With the best lesson being, there will always be losses and failures. That’s life. That’s life in the market.

I’m optimistic about 2014 being a banner year, financially. That’s because the market had such a strong 2013 and I am optimistic it can go higher, a lot higher, as in a LOT higher.

That doesn’t mean it will go up in a straight line. That’s not likely.

After all, there’s “stuff” out there bugging economists, analysts, investors, and me too. There is stuff to worry about.

There’s the Federal Reserve’s extraordinary efforts to manage interest rates so that the short end of the yield curve is zero and the long end (the 10-year is now the most watched benchmark) is 3%; meanwhile the 30-year Treasury bond yields about 3.92%.

Where are interest rates going? Rates going higher in an orderly fashion isn’t a problem. I worry that the Fed could lose control of its ability to manage the rate of change in rates or the slope of the yield curve.

We have reason to worry that there’s a huge disconnect between the market’s strength and the economy’s lack of strength.

The gross inequality in wages and household wealth is disturbing too.

So is the high level of structural unemployment and the low level of job creation.

There are lots of things to worry about, socially and economically. But worrying isn’t the same as being pessimistic.

I do worry. And I’m optimistic a lot of these worries will be addressed and resolved.

When it comes to making money in the stock market, it’s important to first and foremost realize that publicly traded companies, especially giant multinational corporations, aren’t the economy. They are proxies for their industries and their tiny slice of the economy, all the better if they’re players in the global economy.

Listed companies account for a relatively very small number of the workers, wages (not including top executives), and problems the economy faces. Listed companies – the ones we can make money investing in – are not the problem. They are our financial way out of a lot of our problems… and if you are optimistic, you can make money in the market.

And why shouldn’t you be optimistic that you can make money in the markets?

So you had a bad luck streak in dancing school, so what?

So you missed last year’s almost 30% rise in stocks, so what?

So you missed the run up since March 2009, so what?

We’re in the first, and getting a little long in the tooth, stage of a generational bull market.

We’re going to have lots of downdrafts on the rocket ride higher. Some will be scary. But that’s not any reason to be pessimistic.

Me personally, I love up-markets and I love down-markets. I can and do make money in both. I tend to make a lot more money, a lot quicker, in down markets, which is not un-American. But, because I’m an optimist and I believe things can always get better, I am always in the market buying too.

Here’s the takeaway today: I’m optimistic. I’m going to make a lot of money this year. And I’m going to tell you here, right here, what I’m doing, and I’ll tell you why.

We start on Monday, so put on your dancing shoes.


[Editor’s Note: See Shah’s piece in Money Morning today on why we’re in a generational bull market.]

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How I Know JPMorgan Was Complicit in the Biggest Ponzi Scheme Ever

9 | By Shah Gilani

I’ve said it before, and even though I’ve been threatened, in not so subtle ways, and been warned not to piss off certain people in power, I’m going to keep on saying it:

JPMorgan is a criminal enterprise.

Today the mega enterprising bank is in talks to settle civil and criminal charges that it ignored signs its banking client Bernie Madoff was a Ponzi-running, lying, cheating crook. (Which he was.)

It looks like the brazen bank will pay $2 billion to get out of jail free; free, of course being a relative charge. But I call it free because JPM has been posting record profits, and another multi-billion-dollar fine is unlikely to change that.

So what that they’ve paid about $20 billion in settlement fines in the last 12 months? They’re still in business. They’re in the business of making insane amounts of money to pay insane fines for insane criminal activity.

I’ll say it again… JPMorgan Chase is a criminal enterprise.

For this new payoff, I mean payment, to the government, JPM’s criminal ways were nodded to and shunted aside in a deferred prosecution agreement with the feds. The tradeoff will be such that JPM will swear it will do no evil (just the evil they will list, not any of the other evils they do that they don’t have to list) and promise to be good while they’re being watched. And if they don’t do any more Ponzi-schemer aiding and abetting in the probably five years they will be watched, the deferred prosecution agreement dissolves. After that, they have a Whale of a party, probably over in London, where they hide other stuff.

I’m going to keep this short. There’s another reason, besides not wanting to repeat myself over and over, and I’ll tell you the other reason on Thursday. So keeping this short, I’m just going to say one thing to explain JPMorgan’s role in the biggest Ponzi scheme in history.

In my expert opinion, it’s just not possible that JPMorgan (and plenty of other intermediaries and feeder funds) didn’t know that Madoff was running a scheme.

I didn’t know anything about Madoff. No one ever asked me about him or what he might be doing to generate the returns he was generating. But any back-of-the envelope calculation of numbers – based on what he said he was doing – would have come up with a giant “does not compute” answer.

Here’s the deal.

Madoff said he was making the money in the options market. All anyone had to do was ask him how much he was managing (which he boasted about), then back into how much he’d have to make on his options strategy to get the steady 10% returns he claimed. And if you had a lick of knowledge about options, you’d ask yourself, “Holy cow, how many options contracts is he trading?”

Then you’d ask yourself, “Gee, I wonder how he’s impacting the spreads of the options he’s trading and how he manages to not impact his own returns himself!”

You’d be so struck by the whole strategy that you’d look at the options market volume and… your eyes would be wide open.

Based on the amount Madoff was supposed to be managing, he’d have to be trading more than all the options traded on the CBOE… everyday… and not impacting any of the spreads.

And no one in the business stopped to figure that out? No one who was a conduit or feeder who fed Madoff billions of dollars to trade – so they could collect their piece of the fee Madoff charged – stopped to figure out what he was doing so they could manage the money they were feeding him themselves… to keep all the fees themselves?

Of course they did. And they figured out it couldn’t be done. But they also figured out they were getting paid and had plausible deniability if the scheme ever imploded.

So either JPMorgan Chase is a criminal enterprise… or they are the stupid to the nth degree… and we know that ain’t true.


I’ve Got a 38.46% “Profit Target” on My First Trade of 2014

31 | By Shah Gilani

It used to be that getting an education was a ticket to a better life. Maybe not so much anymore.

That’s because the ticket that gets “punched” too often punches back – hard.

It’s not that a college education isn’t good for you. It’s that the cost of higher education could ruin you and your family.

It sure looks to me like “selling” kids on an education that will saddle them with an extraordinary amount of debt, for a promise that’s increasingly hard to cash in on, is a racket. It’s just another consumer come-on.

If the education system was so stellar and such a conduit to a better life, why are 40 million people in America saddled with an average, AN AVERAGE, of $30,000 in student loan debt?

Where are the jobs they’ve mortgaged their futures for?

It’s especially painful to see young people load up on debt when they don’t know what they want to do with their lives or what career path to follow. Those kids come out of college with a piece of paper that’s closer to a sentence than a pardon.

Last October, when the nation’s headline unemployment was at 7.3%, youth unemployment (those between 20 and 24 years old) was 12.5%. On top of that, the Consumer Financial Protection Bureau (CFPB) says real wages for young college grads fell 5.4% between 2000 and 2011.

Then there are the millions of other Americans being sold on careers that are supposedly only available if you have a degree from some for-profit training school that spits out students, an increasing majority without any degrees, with no job prospects, but with a mountain of unforgivable debt. These come-on schools are very profitable.

Now here’s the real problem underlying all of this… and a simple way to trade it today for projected 38.46% gains…

The real problem is this. Where are people getting the money to go to training schools and schools that cost more than a house in the suburbs in the heartland of America? They’re getting the money, and getting it easily enough, from eager private lenders and increasingly from the government.

On the private side, there are fewer lenders in the game willing to finance student loans. That’s partly because federal laws have changed the landscape for student loan accounting.

Only three private lenders account for 75% of private money loans. SLM Corp., also known as Sallie Mae (SLM) accounts for 51% of those loans. Wells Fargo is second, with $22.5 billion in student loans outstanding. Discover Financial Services is third.

Lenders like JPMorgan, which got out of the business last summer (JPM has $11 billion in student loans outstanding), are exiting. Part of the reason is that they’re worried that they will have to write off ever-larger volumes of non-performing loans. And that hits their bottom lines.

The federal government now accounts for almost 90% of new student loans or guaranteed private loans. Student loans are second in size only to the nation’s mortgage loan business.

It’s big business. Student loan lending supports millions of teachers and workers at thousands of America’s schools, public and private. The schools play the game the hardest. They want kids and adults to borrow to come to their schools. It’s how they survive.

According to the CFPB, lenders, public and private, are now bracing-up a $1.3 trillion mountain of student loan debt that’s slipping from their grip.

Bank write-offs of student loans between January and August 2013 totaled $13.6 billion, says Equifax (the credit reporting agency). That’s up a whopping 46% over the same period in 2012.

It’s not that the default rate – which is generally when a loan is 60 days past due – has been accelerating. The rate has been fairly constant at between 6% and 8%. What’s worrisome is that the default rate now represents a much larger number, because the amount of loans outstanding is rising more rapidly than at any time in history.

However you feel about this, on a business level, the question might be asked, is there a way to make money from the towering inferno that shines brighter and brighter as it burns more and more people?

Of course there is.

One way to make money would be to sell short Sallie Mae – SLM Corp. (NasdaqGS:SLM). If the mountain of fire burns out of control, SLM will likely take a tumble. If you want to short SLM, it’s near its 52-week high right now (around $26.00). I’d take a shot here and short it. I’d cover my short at $28.60, taking only a 10% loss if the position went against me. On the profit side, I’d get out below $16.00, for a 38.46% gain.

A 38.46% profit is a nice way to start the year. But it’s really nothing compared to what I’ve got in store for you in 2014. When you know how to work the short trade, every day becomes an opportunity to capture a fortune. In fact, the biggest opportunity of all is coming in the weeks ahead. So please stay tuned.

Now, back to the larger problem: the higher education trap. Don’t get me wrong here. I’m all for an education. But maybe kids should go to a two-year school, or a community college, or anywhere where they can afford it by paying their way through on their own, until they have that “aha” moment and know what they want to do with their lives.

In a system that encourages borrowing, that makes it easy to get into the building but impossible to get out, we should be looking at why tuitions are so high, why so many for profit schools fail their students, why kids and adults are sold so hard on borrowing to get lower-paying jobs, and why the government is aiding and abetting all that borrowing and perpetuating the worst parts of the problem.

Is this a social question? You bet it is. And I want to hear from you. What are your experiences? How have you dealt with this issue in your lives (or seen it in your family)? What bothers you most about the student loan game?

What do you think?