If yours wasn’t happy, just think – it could have been a lot worse. You could have been the turkey and gotten slaughtered, like the turkey in this tale I’m about to tell you.
It’s a tale of two birds of a feather, one a greedy, fat butterball stuffed with gibberish and ripped-off profits.
And then there’s the other bird. It’s not just easy pickins for the butterball investment banker that stuffed it royally, but itself a turkey of international renown.
Keep reading, and find out why we may soon get to see the insides of one of the crookedest birds around…
The two turkeys are Goldman Sachs Group Inc. (NYSE: GS) and the Libyan Investment Authority (LIA), the nation of Libya‘s sovereign wealth fund.
Back in Big Mo‘s day, in early 2008, the Libyan Investment Authority (“Big” Muammar Gaddafi‘s piggybank) put on some complex derivatives trades that Goldman Sachs allegedly talked it into.
Not that Goldman is known for its honesty. After all, it helped Greece lie and cheat its way into the European Union by masking that Mediterranean nation’s budget deficit with currency swaps and dubious derivatives dealings.
Nonetheless, Big Mo’s money machine trusted the golden fleecers.
Folks say, “It takes one to know one,” so we should be able to assume these two knew whom they were dealing with.
But apparently not.
Here’s what happened, according to statements, filings, documents and evidence being bandied about in the U.K. High Court of Justice, where the Libyan Investment Authority is suing Goldman Sachs.
Goldman took advantage of the LIA’s “inexperience” and “naiveté” and slam-dunked them like LeBron James taking it to Danny Devito.
Big Mo’s men say that between January and April 2008, Goldman’s boys sold them nine derivatives trades worth $1.2 billion. After the credit crisis crash, the trades were worth all of nothing.
Goldman, on the other hand, for its handiwork, pocketed $350 million.
The LIA’s suit alleges that the trades were unsuitable, that Goldman’s profits were “unusually high for financial derivative transactions involving a substantial international bank,” and that the premiums the LIA paid were “substantially overvalued.”
The trial gets underway in 2015. Right now, the two sides are jockeying in the High Court.
Now we’re going to get to find out what Goldman’s 13-man Libyan banking team and another nine Goldman executives, including Michael Sherwood, co-chief executive of Goldman Sachs International, said in e-mails. We’ll learn what advantages Goldman had over the LIA in talking the authority into trades and how Goldman planned on harvesting flowers from the Libyan desert.
What’s going to be even more interesting is learning to what extent Goldman overcharges and tees-up customers on opaque derivatives trades.
In your post-Thanksgiving hangover, you may grumble as your tummy rumbles, “Who cares?” After all Goldman and Libya are two giant turkeys who deserve to slaughter each other.
I care, and you should, too. If for no other reason, it’s good theater.
One of them got plucked, for sure. I’m hoping the other one – the bigger, fatter, more crooked critter – gets its wings clipped, too.
There is nothing in the market’s way right now. While stocks travel the path of least resistance, how soon will the Dow Jones Industrial Average hit 18,000 and beyond? Shah talked with Stuart Varney on Fox Business on Monday about a year-end rally – and the one stock that will profit the most from these peak prices.
Talk about putting your foot in your mouth. This would be funny if it wasn’t sickening.
During congressional questioning on Friday, Sen. Elizabeth Warren (D. Mass.) commented that the U.S. Federal Reserve‘s job is like that of “a cop on the beat.”
And that’s when New York Fed President William Dudley inserted a foot in his big mouth.
He responded, “I don’t think our primary purpose as supervisors is a cop on the beat, it’s more like a fire warden; make sure that the institution is well run so that, you know, it’s not going to catch on fire and burn down. And managed in a way that if the institution is stressed that it doesn’t collapse and threaten the rest of the financial system.”
In other words, there’s no “policing” going on.
Dudley said it – not me.
But today I’ll share with you what I do have to say – and I’ll show how the close relations between Wall Street and Washington could lead to yet another financial conflagration…
Too Close for Comfort
According to Dudley, then, the Fed’s job – its reason for existence – is to protect banks from burning themselves down when their greedy schemes ignite depositors’ ample piles of kindling.
The New York Fed president was testifying before the Senate Banking Committee’s Subcommittee on Financial Institutionsand Consumer Protection on the subject of the Fed being too close to the banks it’s supposed to police.
Now we know why banks and the Fed are so close. When the banks’ crack pipes break from excessive heat, the Fed is there with liquidity beer bongs to dampen their highs so they don’t OD and send the whole economy on a bad trip.
And here’s even more evidence that lawmakers failed to jam the revolving door between the big banks and their so-called regulatory agencies following the 2007-’08 financial crisis: Dudley is the former chief economist of Goldman Sachs Group Inc. (NYSE: GS).
And after that statement, he wasn’t done.
Dudley stuck another foot in his mouth by explaining why the Fed is not the cops.
“Our main goal is to ensure the safety and soundness of the institutions that we supervise,” he told Sen. Warren. “If in the process of doing that we see behavior that we think is illegal, then our job is to refer it to the enforcement agencies.”
A stunned and angry Sen. Warren replied, “But you don’t think you should be doing any investigation? You should wait to see if it jumps in front of you?”
Yep, that’s what the Fed’s job is. It’s not an arson investigator or fire inspector, just a fire department putting out pesky conflagrations by pumping more flammable liquids into their basements.
How else are banks going to survive and thrive?
When it comes to foot and mouth disease, the Fed is Patient 1.
“Business culture in the banking industry is favoring, or at least tolerating, fraudulent or unethical behaviors.”
That’s what Ernst Fehr told reporters in a telephone interview this week.
Fehr is an economist at the University of Zürich in Switzerland who co-led a study about business behavior.
Fehr’s study proves what we’ve all long knew – but it wasn’t the only piece of news last week that demonstrates the crookedness of bankers.
Today I’ll show you how Wall Street‘s manipulations are affecting the prices we pay for everything from the cars we drive to our pots and pans.
So you know you want to know more about this…
The Robber Baron Class
The prospectus of Fehr’s study, which was published in Nature, can be found here.
According to Reuters, “Fehr’s team conducted a laboratory game with bankers, then repeated it with other types of workers as comparisons. Participants were asked to toss a coin 10 times, unobserved, and report the results. For each toss they knew whether heads or tail would yield a $20 reward. They were told they could keep their winnings if they were more than or equal to those of a randomly selected subject from a pilot study. The results showed the control group reported 51.6 percent winning tosses and the treatment group – whose banking identity had been emphasized to them – reported 58.2 percent as wins, giving a misrepresentation rate of 16 percent. The proportion of subjects cheating was 26 percent. The same experiments with employees in other sectors – including manufacturing, telecoms and pharmaceuticals – showed they don’t become more dishonest when their professional identity or banking-related information is emphasized.”
With that as background, here’s another news flash.
The U.S. Senate Permanent Subcommittee on Investigations is finishing up a two-day hearing today on whether banks like Goldman Sachs GroupInc. (NYSE: GS), J.P. Morgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) should be restricted from owning or trading physical commodities such as oil and metals.
While the hearings weren’t prompted by the University of Zürich’s research, it feels like they could have been.
The Senate subcommittee has been investigating whether banks’ participation in markets, where they also control infrastructure assets, influence prices and harm consumers. Some lawmakers argue such activity – particularly banks’ ownership of power plants, shipping containers and metals warehouses – creates the potential for anticompetitive behavior.
Others looking at the same facts and figures extrapolate out their findings a step further. I’ll speak for them, because I am one of them.
Banks don’t own all these hard-asset facilities just because they are profitable businesses to own and run. Banks own them to manipulate prices and markets, which is infinitely more profitable than just owning storage and transportation facilities.
Yesterday, Sen.Carl Levin (D-Mich.), chairman of the subcommittee, spent three hours accusing two witnesses from Goldman Sachs of manipulating aluminum markets. He then asked J.P. Morgan Chase and Morgan Stanley why they had tried to hide their supposed “investments” in metals and natural gas from regulators.
Levin’s rhetorical quote of the day was, “If you liked what Wall Street did for the housing market, you’ll love what they’re doing for commodities.”
A good part of the hearings yesterday focused on activity at a Goldman aluminum-warehousing subsidiary, Metro International Trade Services LLC.
The Wall Street Journal today reported this from the hearings, “A pair of Goldman Sachs executives said their actions didn’t affect those prices (aluminum) and they were acting on orders from clients. In a series of testy exchanges with Messrs. Levin and Senator John McCain, the executives acknowledged the warehouse firm introduced a new transaction structure after Goldman bought it in 2010, causing metal transfers between warehouses that created a logjam and drove up wait times for customers to withdraw aluminum. Metro International’s chief executive, Chris Wibbelman, said another part of Goldman, its commodity-trading arm, ordered withdrawals of 300,000 tons of aluminum from the warehouses and further extended wait times in 2012.”
No, there’s no manipulation there.
We don’t need international research studies to tell us banks are greedy, manipulative liars and cheats. We live it 24/7 and have ample proof they aren’t just robber barons.
They are something much worse.
They are an institutionalized, protected criminal class who run the United States – and too many other supposedly free nations – for their personal benefit.
If we aren’t jailing these criminals, ask yourself, “Why not?”
As we head into the final weeks of 2014, many stocks are at all-time highs. Among others, Target Corp. (NYSE: TGT), Keurig Green Mountain Inc. (Nasdaq: GMCR) and Microsoft Corporation (Nasdaq: MSFT) are all at or close to their historic peaks.
On Tuesday, Shah talked with Stuart Varney on Fox Businessabout which of these companies are looking tired – and which ones are likely to hold or spike even higher as we head into the holiday season…
There’s a lot of action over in the subprime auto sector, and it’s not pretty
The saying is “Where there’s smoke, there’s fire.” So, it’s probably just a matter of time before the mainstream media and the general public catch on and see the flames being vigorously fanned by greedy lenders.
It’s the same old story – and one I’ve recounted here before.
Lenders are making subprime auto loans to low-income (and no-income) borrowers, most of whom are down on their luck. And the lenders are teeing those folks up to hit them out of the park again.
The name of the game is yield. That’s what it’s been since the U.S. Federal Reserve started manipulating interest rates further and further down.
Yield-hungry investors want more income. Fee-hungry bankers want to deliver it to them. And car-hungry buyers are getting suckered.
A lot of the country’s current economic “optimism” is predicated on surging auto sales. So, maybe the state of the economy isn’t as rosy as the president, Congress and the media would like us to believe.
And today I’ll show you why…
Bottom Feeding for Borrowers
Auto lenders fan out to dealers, especially to used-car dealers, where low-income borrowers are more likely to shop. The lenders tell the dealers to sell cars, and they’ll make loans so borrowers can drive off in that shiny used clunker.
However, the lenders don’t want customers with good credit to borrow to buy. They want to lend to struggling people whose credit is so bad that they know they’re going to get hit with a lot of interest.
And these borrowers, no matter how “subprime” their situation, can get loans.
You see, the worse their credit, the higher the interest rate. Because the car might be older, they’re going to want a warranty and some other must-have services and “upgrades” to make sure the car is going to get them where they want to go. And for too many of those folks, that’s the unemployment office.
But what if the borrowers don’t pay? No matter – lenders “protect” these cars as collateral and can pick them up wherever they are turned off and left on the side of the road because of the neat shut-off devices dealers are installing.
That, however, is another story.
What am I worried about? I’m looking at the smoke and figure the flames are coming.
If you haven’t seen the smoke, here’s where it’s coming from:
The U.S. Justice Department has subpoenaed GM Financial (NYSE: GM) and Santander Consumer USA Holdings Inc. (NYSE: SC) over their subprime auto underwriting and securitization practices.
The U.S. Securities and Exchange Commission (SEC) is looking into Ally Financial Inc.’s subprime auto lending practices.
The New York State Department of Financial Services is suing Condor CapitalManagement, a subprime auto lender accused of stealing from its customers.
The New York County District Attorney’s Office recently subpoenaed Capital One Financial Corp. (NYSE: COF) regarding its subprime auto-lending business.
The New York City Department of Consumer Affairs said on Friday it’s investigating used-car dealers’ tactics for getting low-income borrowers to take out more expensive loans with hidden fees.
The federal Office of the Comptroller of the Currency’s deputy comptroller for supervision risk management said in a speech on Oct. 28 that he’s concerned about borrowers’ equity in their cars relative to the amount borrowed and the actual resale value of the cars.
And the federal Consumer Financial Protection Bureau is on the case, too. It’s opening more investigations after extracting $98 million from Ally Financial last year, having charged the lender with jacking up interest rates and fees to African American subprime auto borrowers.
That’s a lot of smoke.
What’s sad in all this is that sophisticated lenders and auto dealers are using these poor folks in order to soak them and then repossess their cars. And then they’re doing it again and again to as many down-on-their-luck borrowers as they can wave into their showrooms and onto their lots.
Do you still think auto loans are just the minor leagues compared to the mortgage game that home lenders played not long ago?
U.S. stocks have been making new highs in recent days. And I believe we’re looking at strong odds for a market rally that lasts to the end of the year.
There are lots of reasons why stocks are headed higher, but one in particular is both surprising and telling.
It’s also a difference maker.
You see, if you understand what that “catalyst” is, you can pick some winners yourself.
And today we’re going to look at it together…
The Bonus Round
The financial markets – stocks, bonds, derivatives and currencies, for instance – can be quite complex.
But the catalyst that’s likely to drive U.S. stocks higher between now and New Year’s Day is surprisingly simple.
You see, if the players on Wall Street are going to earn their fat year-end bonuses – and, in some cases, actually keep their jobs – the Dow, the S&P 500 and the Nasdaq need a good rally during the final weeks of 2014.
Here’s why the institutional players are feeling such urgency.
In spite of markets making new highs repeatedly this year, it hasn’t been a smooth ride.
The bumps throughout the year, especially the mid-October swoon, kept money managers on edge and too often took them to the sidelines and out of the action. Worse, a lot of hedge funds were betting against the rising tide of stocks and shorting U.S. government bonds.
2014 started out well enough, but an ugly 5% dip in late January scared stock players into believing that the long-in-the-tooth rally was nearing a possible end.
That didn’t happen.
Stocks rallied back and higher, though not without a few minor bumps here and there.
Then at the end of July, after the S&P 500 poked its head above 2,000, we got another quick 5% pullback. Once again, there was talk of the rally getting tired and petering out.
That didn’t happen.
By late September, stocks made new highs, closing nicely above 2000. Then, seemingly out of nowhere in mid-October, stocks tanked about 8.75% in what seemed like the blink of an eye.
That’s when a lot of managers threw in the towel.
Most mutual fund managers sold winners and raised cash, while at the same time aggressive hedge funds shorted momentum stocks and tried to push the market lower.
Unfortunately, hedge funds got a double whammy in the mid-October selloff.
The mini U.S. stock market panic caused the usual “flight-to-quality” run into U.S. government bonds. The U.S. 10-year yield dropped from about 2.25% down to 1.85% with stunning speed.
The mini-panic had resulted from a sell-off in European stocks when weak European sovereign peripheral countries saw interest rates unexpectedly rise on their government bonds,
The problem for hedge funds was that they were short U.S. government bonds, believing that the coming end of quantitative easing would cause rates to rise. Bond prices fall when yields rise.
However, the flight-to-quality run into U.S. bonds caused bond prices to rise to near record highs – not fall. Hedge funds that were short government bonds got killed when prices went through the roof.
Then, even more quickly than it fell, the stock market bounced to new highs yet again. And just as quickly as bond prices rallied, they fell back to where they were before the stock-market sell-off.
Net, net, mutual fund managers and long-only money managers (“long-only” means they don’t short stocks) sold stocks, raised cash and went to the sidelines. Hedge funds had little choice but to lick their wounds and scratch their heads.
When the picture in Europe all of a sudden looked brighter, thanks to calming pronouncements from the European Central Bank, U.S. stocks rallied back with a vengeance.
However, because they feared the October sell-off was the end of the rally, long-only money managers missed the quick run-up to new highs.
Now, those managers are lagging the S&P 500’s positive 2014 performance, and hedge funds sitting on losses all have to figure out how to make money by New Year’s. Their bonuses and jobs depend on it.
So, the easiest path for them all is the path of least resistance, which is up, up and away. That’s what they’re betting on. They all got into stocks as the bounce was creating new highs, and now they have to push stocks higher so they don’t lose out.
That’s how Wall Street wants to play through year’s end. It doesn’t mean the market is guaranteed to go higher. There will be some big players who will short stocks up here and try and create a panic.
And the market is facing the usual macro-global headwinds. Russia is entering Ukraine again, and there’s the possibility of a full-blown conflict there.
Still, when it comes to Wall Street paychecks, they’re going to do whatever they can to get markets higher through the end of their December performance and bonus calculation period ends.
How can you play along?
The best opportunities will be getting into big-cap stocks that have lagged in the recent rally to new highs.
Players will look to push those stocks higher. Stocks having made new highs will be looked at as fully valued for the moment, and big-caps with good earnings that haven’t moved up as much will be seen as undervalued and ripe for a bounce.
Here’s why big-caps are the way to go.
After saving their jobs and earning their bonuses, managers may want to pull out after their year-end accounting periods have passed. And it’s easier to get out of more liquid big-caps than mid-caps and small-caps.
They look ripe to bounce, too, but are less liquid than big household names – so now’s the time to go large.
Shah appeared on Varney & Co. on Wednesday to tackle one of the biggest concerns heading into the spending season – security. Will shy retail shoppers affect the future of stocks like Alibaba Group Holding Ltd. (NYSE: BABA) and Amazon.com Inc. (Nasdaq: AMZN)?
Shah tells us who we should be buying and who we should be selling…
I’m talking about the Friday employment numbers, not the election.
Though they do have something in common. I’ll get to that.
But first let’s celebrate how good we all feel now that unemployment is down to 5.8% — its lowest level since July 2008.
OK, now it’s time to get back to the election, which put Republicans back in charge of the U.S. Senate.
But not because I’m going to comment on it. At least not yet…
We Can’t Get No…
The big media conducted some national exit polls on Tuesday.
And in light of the how lighthearted we’re supposed to feel about that 5.8% unemployment number, I thought I’d share some of those exit-poll numbers with you.
In case you don’t feel all warm and fuzzy about the headline unemployment figure – and are wondering how other people feel about how good they feel – here’s some food for fodder.
According to exit polls, 35% of people who voted feel things in the country, mainly the economy, are getting better. Almost as many, 31%, however, think things are getting worse. And 35% said “things are the same.”
That compares to 64% of voters and nonvoters in a late-October Wall Street Journal/NBC News poll who said they were “somewhat” or “very dissatisfied” with the state of the economy. Only 36% said they were “somewhat” or “very satisfied” with the economy.
The exit polls had 50% of voters saying they expected life for the next generation of Americans would be worse than it’s been for them.
But again, a broader WSJ/NBC poll of both voters and nonvoters conducted in August found that 76% of people surveyed doubt their children will have better lives than they do.
So, if you’re not feeling all warm and fuzzy that unemployment fell to 5.8%, it’s understandable.
After all, if you read between the lines of Friday’s unemployment stories, you know that 7 million working people in October were working part-time jobs because they couldn’t find full-time jobs. That’s 2 million above pre-Great Recession levels.
You also may not be feeling all that warm and fuzzy because we’re likely headed for a lot more feuding between Congress and the White House as the United States rots.
That’s understandable, too.
What do the headline employment numbers and the election have in common?
Why don’t you tell me what you think in the comments below? I want to hear from you.
Then, I’ll get back to telling you how to make money.
That’s what I told you all earlier this week when I answered one of your questions about how to start making money in the trading markets.
Get started by taking positions in stocks, exchange-traded funds (ETFs) or whatever it is that you know something about. Next, learn more about what you don’t know, and then keep learning.
The second basic principle when you get started is that you have to be OK with losing some money – but never lose more than you can laugh off. And you must learn from every loss. Understand what happened and why.
Of course, there’s a lot more to it than that. So today I’ll answer some more of your questions.
Consider these columns the first couple chapters of our How-to-Make-Money Manual.
Is that something you’d want to read?…
Q: Other than wanting to grow my investible money, I have no clear strategy and seem to be bouncing around the multitudes of advice and going by trial and error. Do you have any thoughts about how to find what works for me? -John P.
Q: I’ve heard of day trading but don’t know much about it compared to longer term investing. What are the risks of day trading, and do you recommend trying it instead of long-term investing? -Kenny T.
I do have thoughts about how to find what works for all of you, and part of that includes addressing trading and investing.
First, there is a huge difference between trading and investing.
Trading is short-term positioning where the trader gets into a position to make money, take profits and move on to another trade. That may include taking another position in what he just got out of, or taking an opposite position on the same instrument he just got out of.
Some of the most successful traders on Wall Street do just that. Those traders are specialists on the New York Stock Exchange and market makers. And a lot of institutional traders do the same thing.
Think about that. They’re doing exactly what I told you all to do on Monday – taking positions in something they know about.
If you trade the same stocks over and over and over, you will become an expert in how they trade, how they react to news and earnings and how they trade on the market’s movements.
The great majority of “professional” traders do their swapping in a limited universe of stocks or commodities, or whatever they follow.
If you’re going to trade to make money, follow a few stocks and trade them until you become an expert in how they trade. Trade them on the way up and short them on the way down. You can make money both ways.
When you know your stocks, trading becomes a game. And besides being lucrative, trading is fun, too.
Investing, on the other hand, is the old “buy and hold.” But there’s a lot more to it.
I advocate and practice both trading and investing, and you should, too.
It doesn’t matter what you think you are, or what you want to be, a trader or an investor. You absolutely, positively have to be both.
Again, investing is not rocket science – it’s about making money. You make money when opportunities present themselves. And when they do, the first thing you do is put on a trade.
It doesn’t matter if you buy something expecting its price to go up or short something expecting its price to go down. You always start the same way – you put on the trade, you take a position.
Whether any given trade starts out as an investment or ends up being an investment is just a matter of time. How long will you have the position?
I have made many trades that turned into long-term investment positions. And I’ve made what I thought were investments only to sell them fairly quickly.
Taking the Long View
Here’s my guide to making an investment, meaning getting into a position for the long haul.
First, I want to know enough about what it is that I’m buying to be comfortable understanding why the position might rise and, more importantly, why it might fall.
Second, although I like and do invest in “growth” stocks, I prefer to invest in good dividend-paying stocks that have strong, if not dominant, industry positions and are too-big-to-fail and too-big-to-be-derailed by some up-and-coming technology or competitor.
Because I’m thinking about investing and not trading, I’m probably going to take a bigger position and intend to add to it. That doesn’t mean I’m going to jump in big. I’m still going to put on a trade, and from there I’ll add to the position according to a plan.
If you’re putting a lot of money into an investment position, you better have a plan for when the stock or the market goes down and for when things go up.
The reason I prefer dividend-paying stocks and instruments is because then I don’t mind adding to the position when the stock goes down. If the dividend is secure, as the price goes down, the dividend yield goes up. So, I like adding more income for less money in an investment.
On the way up, because it’s doing what I expected, I’ll add more to the position until I get to my predetermined allocation of my investment capital to that position.
That’s the plan. But it doesn’t always work out. And that’s when I trade out of the position.
If my investment isn’t working out, or looks like it might face a down-trending market, I’ll get out and wait to reenter the position at a better time.
However, that is the biggest problem traders and especially investors have – timing.
There’s no hidden formula for timing a trade or getting into an investment. Your knowledge about timing comes from your own experience.
I’d say I’ve been lucky doing that, but I’m not really lucky. I’m good at trading and investing because I’ve been doing it for so long.
You, however, don’t need more than 30 years to be good at it. You just have to keep learning and understanding how your positions move. And if you start out with small number of positions that won’t hurt you if you lose and get out, you’ll learn – and your timing will get better and better.
One last thing on timing. No one teaches you this, but it’s all you need to know. Timing is about you. You have to listen to yourself and trust your feelings – you already know more than you realize.
If you only trust other people’s advice and timing, you’ll never be successful, not the way you want to be. To make money, you have to know it’s your money and you rule over it, and what you do with it is all up to you.
You can learn to trade and invest and make a lot of money. I learned. It took a while, but I got it.
I want you to get it, and get a lot of it.
What works for you, whether it’s trading or investing, is up to you. You can choose or, better yet, you can do both. They both work.
In the next chapter of our How-to-Make-Money Manual, I’ll talk about when to get out if things aren’t going your way and how to use stops.