StanInvest

Stan Invest

S2S (Stan-To-Stan) Blog

Issue 5 - Latest
Issue 4
Issue 3
Issue 2
Issue 1

S2S Tue 16-Dec-2008 2:30PM

Morgan Stanley – shall I throw my spear at that mammoth?

http://biz.yahoo.com/ap/081216/madoff_scandal.html

...The agency's inspector general, in a report issued this fall, said there were "serious questions" about the impartiality and fairness of the SEC's insider-trading investigation in 2004 and 2005 of hedge fund Pequot Capital Management. A former SEC attorney who worked on the probe and was fired by the agency told Congress he was blocked by agency superiors when he tried to question John Mack, now chairman of the Morgan Stanley investment house. The SEC took no enforcement action in the Pequot case. The hedge fund and Mack have denied any wrongdoing....

S2S Tue 16-Dec-2008 2:20PM

Buffett

I am not 100% sure, just have a nagging suspicion on the subject of why did Buffet became subdued after 1999 and why he did not help nor did he play a more active role in trying to save the financial system and the Wall Street from themselves.

- You do not go out in public advocating abstinence while being drunk!

It's purely psychological and very characteristic behavior of people who are naturally honest (I think he is) but somehow transgressed or made a mistake, I suspect it was around 2001. Also, his holding company is probably in trouble judging from their CDS’es reaching a level of around 400 basic point above LIBOR (last time I saw). Very few people are so corrupt to the extreme like that Illinois governor that are capable of preaching something totally opposite to what they do!

Stan

S2S Tue 16-Dec-2008 2PM

Rant

This is a very good observation!   In fact we suspected it long time ago when we talked about nortels and fuckents.

Rant.

Remember that article on the biggest corporate wealth destroyers of all time - AT&T was #1?   I always suspected that all that corporate cosy life, huge salaries and year after year security is too good to be true!   I knew from working for a small company how difficult is to earn every 10,000$.   I knew how difficult is to generate enough business, to pay wages to your staff. I know how difficult is to find clients, negotiate projects then actually make sure they work, so that everyone would be paid.    In every step there is a scope for mistakes and since the business process is sequential, even a small mistake early in the business cycle would usually derail everything and would immediately reflect on your pay! None of that seemed to have affected large corporations! They and their directors seems to have been teflon-coated - too smart to fail!.   They seemed to have been immune to perils of business life cycles and vaccinated against failure.    For years they were able to make blunders, make mistake after mistake: in sales, in marketing, mismanagement or bad governance; they would exhibit some blatant lack of supervision, grossly ineffective project execution etc.   Yet everyone of their staff somehow got payed regardless of whether the corporation succeeded in delivering the products or services that people wanted to buy, or not.

I knew that it was too good to be true and that it cannot last forever and eventually the easy money from stock printing and almost free credit must run out.   Eventually, which is now as it seems, the large ineffective companies will have to face the Grim Reaper and repay their debt in corporate blood.

Going back to basics.

That applies to the government employees too and it is probably only a matter of time before they feel a crunch. You cannot have a situation when one sector has all the available free credit or able to run money printing press while everybody else sees none of that.   At least, not in a democracy.   I predict that there will be a stage when only the basic services will be retained (army, police and jurisdiction) and everybody else will be let go.     I predict that there will be a stage when the only people who will be still in business and be decently paid will be those who produce specific physical goods rather than shuffle paper, and those delivering specific service that people need in everyday life. They will be still making money and will be paid regardless of currencies, interest rates and credit availability.

Stan

Stanley P wrote:

Yes, their CDS look bad

But I would like to point your attention in the new direction:
Yes, railways lost money for 100 years.
Airline lost money for 50 years.
AT&T lost over 100 Billion
Now GM and Chrysler lost and will continue to lose money to the tune of 100 Billion
All these companies probably lost more then they ever earned.

Moral: The only Creative, Profitable and Wise institution is the Government.
Long Live Mr. Harper.
SP

S2S Tue 16-Dec-2008 1:50PM

Glencore and commodities slump

I listened to Puplava and Matt Simons on oil. He pointed out that Glencore company is having some troubles since September or may be January (see the CDS graph in those links below). The CDS'es are basically suggesting that the company is already deader than dead. He is speculating that it is being unwound at the moment, selling off bits and pices of itself at fire sale prices. Being a 150B$ turnover company (very secretive to that) it may potentially explain what is happening on the commodity market. We shall see.

http://www.creditwritedowns.com/2008/11/glencore-swiss-giant-on-edge.html
http://news.kontentkonsult.com/2008/12/another-swiss-giant-on-edge-glencoe.html

http://www.netcastdaily.com/broadcast/fsn2008-1213-2.asx

P.S.

I have to elaborate.

Glencore CDS’es show two maxima: a small one in March of about 300 basic points, and a big one todate (about 1300 points or 13%!!!) that begun in September. In both instances, it coincides with dramatic drop in oil prices. Glencore is describing themselves on their web as “Commodities Trader”. Not just a “producer” but trader! If they happened to accumulate large long positions in the basic commodieties such as copper, nickel and oil then they must have had to start covering and unwinding them when the prices dropped below the support. It is all very well synchronized in time. Being a mishmash of bits and pieces bought on credit or through leverage buy-outs (means more debt), their position is probably precarious now that commodities plunged, and they are probably forced to raise cash by dumping their commodities contracts onto the falling market exacerbating the price decline. It may also explain why are call options for Swiss Franc ETF (FXF) cheaper than any other currency. I bought some.

S2S Mon 1-Dec-2008 10PM

Something is wrong …

http://www.bloomberg.com/apps/news?pid=20601087&sid=a6LXnXaSExJc&refer=home

Nov. 29 (Bloomberg) -- JPMorgan Chase & Co. alleged in a lawsuit that Parkcentral Capital Management LP, an investment firm that manages money for the family of ex-U.S. presidential candidate H. Ross Perot, owes as much as $753 million in collateral on investments.

JPMorgan said it entered into an agreement with Parkcentral in March 2002 obligating the fund to give it “certain marketable securities” for derivative contracts. Parkcentral said earlier this week that it will liquidate a fixed-income hedge fund because it’s “no longer viable” and sell its remaining holdings to pay creditors.

Perot, 78, the founder of Electronic Data Systems Corp. who ran unsuccessfully for president in 1992, and members of his family are the fund’s biggest investors.

Comment:

That looks to me like what Buffett has done! Perot sold CDS'es to JPM and now is unable to hold enough assets to cover the liabilities. It doesn't say whether these CDS'es are already triggered or just that the fund collateral fell below their redemption value. In any case Perot will probably lose his fund! I wonder, if Buffett's assets would fall much below his potential obligations, could he also be vulnerable to a sort of margin call? He took such a risk just to earn 3.8B$ (with a downside of 35B$)? Sitting all the time on 60B$ of cash that he didn't know what to do with?? You know, something is very wrong with that picture! It just doesn't fit!

Please notice the pattern: those experience and well seasoned investors like Perot and Buffett both sold CDS'es - to whom? To large banks? Did it not occur to them that the system may violently correct against them? Buffett has always been warning people against dodgy financial practices, and now it turns out he was betting on the stock market always going up! Perot was also a maverick himself, anti-establishment etc. Why did he have to play a three shells game with JPM. It is all very strange! Could that be that they were both forced to do that?

S2S Fri 28-Nov-2008 1PM

New Billiard Power

Our favored fake energy company will run out of cash in 6 months!

Note that they slashed the engineering and development expenses by 4/5, probably by firing their engineers. That basically guarantees that they won't come out of it! There is also a curious statement: "$3.4 million of the reduction was due to the absence of automotive engineering development revenues."

Does that mean that automotive industry has stopped all involvement with the fuel cells?

Why exactly did they ship only 1000 fuel cell products (for buses presumably), why not 100,000 or 1 millions? Why did they use word “shipped” rather than “sold”? Perhaps there is some fundamental problem that they are not talking about? Short life span due to catalyst poisoning? Last time I checked in some articles from the 1960-ties that was the main problem, that's why you had to use pure hydrogen (palladium filtered). That's why they could never put those Apollo mission fuel cells that worked so great in space, on public transport buses, except one in Vancouver... 8-:)

I am curious how are they going to solve their main problem with the atrophied R&D budget?

http://biz.yahoo.com/prnews/081109/to455.html?.v=44

P.S.

I just noticed this news:

http://biz.yahoo.com/prnews/081030/to224.html?.v=2

John Sheridan, Ballard's President and CEO stated, "This non-dilutive financing transaction further bolsters Ballard's already strong balance sheet, providing net cash proceeds of 41 million Canadian dollars to augment our cash reserves by more than 50%, compared to June 30, 2008. This is a very positive development for shareholders and will enable the company to execute its growth plan without any need for public market financing over the foreseeable future."

This transaction involves a corporate reorganization, to be completed under a Plan of Arrangement, under which Superior Plus will transfer approximately C$46 million to Ballard. Ballard will subsequently transfer all of its assets and liabilities - including the proceeds from this transaction, but excluding the Company's tax basis - to a new wholly owned subsidiary company ("New Ballard"). On completion of the transaction, Ballard shareholders will have exchanged their Ballard shares on a one-for-one basis for shares of New Ballard.

New Ballard will carry on Ballard's business operations as a public entity and will retain all rights to related intellectual property as before the transaction. New Ballard's cash reserves and shareholders' equity will both increase by approximately C$41 million. In addition, the reorganization allows New Ballard to step up the Canadian tax basis in its assets, which will be applied towards sheltering future taxable income.

As part of the Plan of Arrangement, Superior Plus, on completion of the transaction, will obtain 100% of the shares of the original Ballard entity. That entity will retain Ballard's existing tax basis. Superior Plus will have completed its conversion from an income trust to a corporation.

Translation:

Superior Plus fund will purchase the entire Ballard company, 100% shares for 46M$, wiping out existing shareholders! The new Ballard entity will be much superior to the old one because it will be unburdened by the existing shareholders thus will be able to issue more brand new Canadian stock (good luck!), and will have a tax shelter against some future profits presumably generated by the new future products (by whom? by those fired engineers?)

Disclaimer:

I never owned long nor shorted Ballard Power stock although I wish I had done the latter.

Stan B.

S2S Sat 15-Nov-2008 11PM
Loading up on oil.

Stan B. wrote: Buffett secretly loading up on oil stock since the summer!

http://www.bloomberg.com/apps/news?pid=20601087&sid=ajkMKPc9OiRM&refer=home

Berkshire held about 59.7 million Conoco Phillips shares as of June 30, Buffett revealed in a separate filing. Buffett, 78, won permission from regulators to omit that number from his second- quarter filing and withhold it until yesterday to prevent copycat investing.

Stanley P. answered:

We are not surprised, aren't we? I would do the same right now if I had cash. Personally, I think there will be a further drop in Oil price, but it will be short lived and will not affect major companies. Why? This is YOUR old argument and it is still true and extremely important: because at $50 oil many of Oil Sands projects in Alberta are not viable or marginal. There is no fu..en way to satisfy the growing world demand without Oil Sands. This is the only large oil reserve remaining. There are oil shales in the US, but the price would have to rise much higher and synthetic gasoline would be a competitor. Below $100 it is not, because the process of production is so inefficient. Once the current consumption dip passes, oil has to go up to make this production economical. In short, price will be set at such a level that future supply CAN met demand. Yes, the "big picture" is the base of all investing, especially in a sick economy. Stanley

Stan B. wrote:

I think if a consensus has been reached among people in television, saying that oil will go further then it surely won't!   The fact that you said you had a feeling it will go down (based on TV) then we should take it as a bullish sign!   Please keep in mind that I am not saying that you are wrong, I am just analyzing your and mine "feelings" about it, coldly and impersonally, and "feelings" cannot be right or wrong (but opinions can be). Feelings just are, they are emotions that exist as a form of perception.    It means we probably have the bottom in oil right now!   Please remember when TV analysts begun talking about 200$ oil only when it reached 147$!   Remember I phoned you back then and said I was worried what to do, if I should continue accumulating oil bear ETF all the way to 200$!   I did that but wasn't so sure after it crossed 140$ line.   I got very worried that it will stay there for a long time leaving me thousands of dollars underwater for ever, since I added most of that oil bear ETF (HOD.TO) when oil was around 120$.

So that you know it, right now I am very worried that my oil bull ETF (HOU.TO) will leave me permanently thousands of dollars underwater, because I begun accumulating it intensively ever since I sold my HOD at 90$, that is at a higher price than it is now.     I had to forcibly break my feeling of fear last week and forced myself coldly, against my emotions, to place limit buy orders (several of them stacked down like a ladder, every day) for HOU.TO (and HAU.TO) when oil was diving towards 50$ (I got them all, eventually)!     This is like a real fight, you can really get hurt but you can also beat the beast too! I should have learned some martial art. Can you see what I mean?    8-:)

Re: fundamentals

Totally agree! Oil and energy consumption is as stiff as food!   It is extremely hard to drop it except in very dire circumstances. That's why I am shorting consumer consumables like PG, CL and WMT while accumulating oil.   It's is much easier to stop buying toilet paper or cleanex tissues or other nonessentials than gasoline and meat. If you squeeze ½ cm of toothpaste on your toothbrush instead of 2cm you will discover that it works just as well....   How easy it is to drop the toothpaste consumption by 75%!   Actually I do not use any toothpaste since 9 years ago, I just use water. I also do not use any shaving cream since I discovered that ordinary soap works just fine and have less mess on the bathroom shelf. There is a beauty in simplicity.   Proctor & Palmolive or Colgate and Gamble? You can hear the toilet flushing sound...   8-:)

Re: our yesterday's discussion on Euro

I think not only that model is absolutely plausible but I realized that that was exactly happening in the last 3 months! It is already in the present and the past!   If dollar hoarding took place exclusively within it's own market then it would not have caused Euro to dive. The fact that Euro decreases shows that the businesses are already borrowing in Euro on a big scale, then selling it and buying dollars!     The crunch will come when Euro borrowing would stop, then we will have another massive movement in currency rates.   This might not take very long.

Stan

S2S Fri 31-Oct-2008 10AM
Power and privilege; death of the common stock.

Yes we discovered that last year (in spite of the lack of official info) when we found out that various hedge funds had identical leverage of about 30:1. It was obvious that there must have been a specific reason for that - and there is in fact! That article also illustrated that if the rules allowed a higher leverage like 100:1 or 1000:1 they would have used it probably, because they could arbitrarily reduce the paper risk factor to be always much less than that! I have another comment: in capitalism (or a free market system) responsibility is tied to the principle of long-term ownership. If the whole financial system is run by a bunch of hired “paysant” managers scrambling to maximize their next quarterly bonus though their "own" bank may collapse next year, then this is NOT a capitalism! Also the idea of share ownership turns out to be very different from a true ownership of a company, if anybody can short that stock do death anytime or dilute it at will. Did you not find it curious that all the new deals from now on involve only and exclusively the so-called "preferred" shares that were supposed to be discouraged and obsoleted in the US market (*), or are just taking bonds. No serious investors want the common stock! Even the US government is getting the "preferreds" with warrants and a decent dividend, never the common stock! This creates an ominous precedent, that may in fact spell a death warrant for the entire stock market as we know it!

My take on it is that this is a classical attempt at creating a privilege loophole for the elite. They know that the shares trading at P/E>=20 and 2% dividend are a joke and cannot last! The Boomers financiers probably realized that such stock valuation might not even survive through the next quarter (they are good at short term planning!), thus they have created a new "stock" system that pays them a realistic dividend of 10% and has also much higher P/E in line with the historical 5-10, if you subtract the common stock from the equation!

Stan

P.S.

It's probably a time to start this again.but this time we shall watch carefully with whom we work and never kill the "class enemies" like in the 19-th century or early 20-ties century...

What I have in mind is a development process on an individual level through which people who have leadership tradition, long term view and skills, rediscover their natural leadership role while people who are driven only by short term goals and chase short term personal gains - shall gradually loose their authority.
I also realized that the goal, however lofty may be, never justifies the means - the "means" either become the goal or they cannot be separated!

------------------------------------------

*) When we were incorporating Velsensor Inc., you said yourself (or somebody that we asked for advice) that the system with A class or B-class shares should be discouraged because it causes problems when cross-linking on different exchanges especially in the US. Thus, new companies were recommended to issue only one class of shares. This was logical, fair and I accepted it. Little did we know ... :-)

S2S Sat 25-Oct-2008 3PM
Oil price - is the stock price the only true financial number?

Not anymore!

http://www.reuters.com/article/hotStocksNews/idUSTRE49O0W220081025

"The OPEC cut did not have any positive affect on oil prices and everybody is so depressed," said Abdullah al-Rashoud, chief executive at Riyadh-based KSB Capital Group.

I think that is the proof that oil price is now determined by factors other than the supply and demand between producers and the industrial buyers. One such factor is selling off of the future contracts on the open market to raise the cash by the speculators (hedge funds). I predict that even if they cut oil production to zero, the official crude oil price will still be falling because those who sell paper and those who buy that paper want less and less of it, not more. If suddenly paper oil fell to 10$/barrel and if you tried to order some physical oil at that price, you would be told to wait 52 weeks or go to hell. It is exactly the same with gold except people have sniffed that out about gold and silver but not about oil yet. The difference is that there are plenty of investors wanting to get physical delivery of silver at 9$/oz but can't, whereas no private investor has probably tried yet to buy 100,000tons of crude oil and get it physically delivered!

Falling oil future prices means simply fall of the future price of the paper contract not oil itself. It's the same with gold. It cannot of course last and sooner or later the bluff will have to be called. If the Comex exchange gives silver spot delivery time of 14 weeks - does that mean that they believe that in 14 weeks time silver will be really costing 9$ and they will be able to cover, or do they believe that in 14 weeks something might happens that will make all their outstanding obligations irrelevant?

S2S Sat 11-Oct-2008 1AM
US looking like communist eastern Europe!

Stanley P. wrote:

Paulson Says Will Buy Bank Equity `Soon as We Can' (Update3)

By John Brinsley and Rebecca Christie

Oct. 10 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said the U.S. will buy equity ``as soon as we can'' in banks and other financial institutions to restore market stability and revive economic growth.

The Treasury is ``working to develop a standardized program that is open to a broad array of financial institutions,'' Paulson said at a press conference after a meeting in Washington of finance ministers and central bankers from Group of Seven countries.

The injection of equity would be aimed at sustaining banks and other financial institutions through the worst credit crisis in seven decades. Paulson declined to give a timetable or details about the purchases, and signaled that markets may be in for turmoil ahead.

[comment]
This means the plans have changed. Buying assets at 9c to a dollar would not recapitalize banks.
Buying assets at 100% would destroy the political system
The only solution left is the direct injection of equity ie buying shares.
As you remember, we discussed it today as the only solution left. Obviously others thought the same!

But you know what it means? Partial nationalization of the banking system.
Next, what with these bad loans? They still have to be removed from the banks somehow or the banks will fail anyway
Finally, the existence of CDS will hang over the market like a Damocles sword. If you know any institution can be forced to pay 100B at any time
would you lend anything to them?
Oh Manitou, this will be long and painful!
S

No kidding! This is a full blown banking crisis on the world scale, as we have never seen before!   Not even China is immune since they based their currency system upon the US $ just like Gierek was supported by the Western loans.

My prediction is that they will not be able to solve this crisis without reforming the currency system!   They will have to introduce or invent a totally new world currency to replace the dollar. In my humble opinion, US dollar is mortally wounded as the world currency. It may still survive locally in the US but not as a universal "Monetary Base" anymore!

This is totally different from the 1929-1933. Back then the currency system was not affected (except a 30% devaluation of the dollar); this time all currencies are profoundly affected - some like Icelandic krona has just died!

Current problem is that the "square dollar" simply ceased to function while the round dollar still does the job but there is too little of it in the circulation, worldwide to replace all the square dollars among the banks!

In my opinion, the banks ought to denominate their liabilities and paper assets expicitely in square dollars and then decouple the square $ from the round $ - officially!     Then, they can simply devalue the square dollars by a factor of 10, or may be I should say 100.

Stan

P.S.

Suppose the rest of the world sells US Treasury Securities (Treasuries) on the open market they attract and hoard the dollars – I will call them “round” dollars (R$) that form the “Monetary Base” (cash, notes) as per Tom Szabo’s article . The effect of that is similar to what the banks are supposedly doing right now by selling their Liquid Assets like stocks, commodities futures etc on the open market to raise the cash. The effect in both cases is to hoard the R$ away from the market .

If we consider for the sake of discussion that the Treasuries R$ and Liquid Assets as bartered goods, then we have the situation when the R$ are being hoarded away from the market while the market is flooded with more and more Treasuries and more Liquid Assets. If these were some ordinary 3 classes of goods being bartered, like let us say - sea shells (Treasuries), pebbles (R$) and coconuts (Assets) then this situation must have led to gradually the pebbles becoming scarcer and scarcer while the other two becoming more common. Logically this must lead to Treasuries and Liquid Assets becoming relatively cheaper in relation to the Round Dollars (R$).

That the Liquid Assets such as precious metal futures, the stock, bonds, assets backed commercial papers, property and bonds - are all becoming cheaper by the day is exactly what we are witnessing right now! I postulate that we will see that, if not already happening – a depreciation of the US Treasury Securities as well! Those who hold Treasuries may and will want to exchange then for cash rather than wait till maturity. Even if it means discounting/dumping them at lower price. It is probably only a matter of time. Can this process of Treasuries’ decline be stopped by expanding the “monetary base” (i.e. printing more R$ by the Federal Reserve as per Szabo’s article). [to be continued]

S2S Sun 21-Sep-2008 11PM
Financial World War battle: last ditch attempt at throwing SEC lawyers against CDS nukes fired by hedge funds?

Today's Bloomberg announcement of SEC investigation into short and CDS position of hedge funds may indicate the next stage of the battle where the mainstream American financial institutions and their friends in government decided to fire back at their attackers from the hedge fund "enemy" camp.    In my "big picture" model, international hedge funds have been heavily shorting the world financial system, both stock and bonds! Put options can be used to implement leveraged short stock positions; Credit Default Swaps (CDS) can be used for the same purpose to implement leveraged short positions in bonds. Previous partial disclosures of some hedge funds indicated that CDS'es can be an order of magnitude (factor of ~10) larger than the underlying bonds. The amount of leverage that is possible with CDS is probably comparable to that of stock options but - at much lower cost! Shorting the financial companies or other distressed corporate bonds is probably much more lucrative than shorting their stocks. That was probably going on since last year: - the stock shorting action was probably a side attack to trigger their downgrades, to "push" the banks over the cliff so to speak, whereas the line of attack and profit taking took place on their the bonds.

The last Sunday's unsuccessfull derivative trading session that purportedly "ended up in chaos" showed us that there are many players who seemed more interested in seeing CDS'es triggered rather than unwound. That seems to confirm the "big picture". So is the bail-out of AIG that was deemed necessary just after Lehman's collapse.   The AIG suddenly running out of cash and getting a 85 billion dollar life saving injection, just a couple of days from having declared 20B$ cash in possession as adequate (they "borrowed" that from their subsidiaries) clearly indicates that something bad happened to them on that Monday: perhaps that sudden 65B$ shortfall was casued by Lehman collapse triggering their bonds' CDS'es, of which AIG was the liable issuer!    Suppose they allowed a subsequent colllapse of Merrill, WaMu and Morgan - could each one of them result in further CDS triggers of the same magnitude, of the order of 300B$ - a nuclear pop just a couple of days apart? Potentially more destruction in just one week than during the first 6 months of the property subprime crisis!    This is the real financial nuclear weapon of mass destruction, that Buffett was talking about, seen in action!

Prediction:

Hedge fund "pirates" are fighting on the side of the Free Market. The Mother Nature of Economy is on their side, therefore they will most likely win the war (though might lose this particular battle).   Free Market has always won all the wars in the past rendering her institutional opponets, the rulers, the presidents, the main street banks, the governments and the upper classes holding bags of worthless paper. Every single time. This time it will end just the same! The market will win again and effortlessly, the bankers will loose big way, eventually.

Stan

S2S Fri 20-June-2008 1PM
F like ....

http://biz.yahoo.com/rb/080620/ford.html

The struggling No. 2 U.S. automaker raised $23.5 billion in 2006 by pledging almost all of its assets, including the familiar Ford blue-oval logo, as collateral. But that financing was based on a turnaround plan the automaker now says has been thrown off track by the steep downturn in the U.S. market.

Comment:

People have short memories, me included. I followed their restructuring story in 2006-2007 but then I forgot about it, and missed an opportunity to short them at 9$ a share. Even though I did a session two months ago, I only realized this week what does that mean. I bought 2 puts yesterday..

2 years ago when they adopted their turn around plan, oil was ~60$ and property market was still booming. Please notice the word "all assets". What else can they do now?

Stan

S2S Fri 20-June-2008 9AM
What's the point?

http://www.bloomberg.com/apps/news?pid=20601103&sid=ah5Jxh.Nqzq0

Southwest is the only big U.S. airline that is still profitable, thanks to its strategy for locking in fuel prices in advance. About 70 percent of its fuel needs this year are hedged at prices equivalent to oil at $51 a barrel, less than half of today's price of $136.68 in New York.

I am not getting it, which begs an obvious question: if they barely get even and high oil is here to stay would they not be better off SELLING their hedged 51$ oil for the equivalent of 136$ rather than flying?

I do not quite understand their business rationale, but then I don't have an MBA...

Stan

S2S Tue 12-June-2008 11AM
Polish stock market alert - KGHM (Polska Miedz) expected to pay 18% dividend!

Breaking financial news from Europe today:

- Unbelievable! We are looking at the 2-nd largest copper and 1-st silver producer (and gold) in the European Union, at least 30 years old, that survived real socialism and systemic transition to free market. The stock experienced a large down corrrection last year but with consistent track record of profitability and dividend that was totally uncoupled from it's stock performance. One of the largest company in Eastern Europe. This is NOT a company in distress!

Read the response below [link in Polish].
I still can't believe it.
I am curious about your opinion about it.

How does that compare against investing in China that everybody and his uncle are doing? Is China less risky than Poland? Is some Chinese stock with P/E=20 with economy growing at 10% less risky than Polish stock with P/E=5 and 5% growth? I have a feeling I am not getting it...

Stan

S2S Tue 11-June-2008 11AM
Polish stock - some companies to ponder...

Polish stock exchange (Gielda Papierow Wartosciowych and also this ) is still falling slowly but at very low volume. Valuation of some companies has now become irresitibly attractive, some examples:

KABLE - Slaska Fabryka Kabli, P/E=7.3 total twelve months [ttm], substantial dividend for 2008 to be announced soon.

PKNORLEN - Polski Koncern Naftowy, P/E=5.5 ttm, dividend 4.5zl that is 12% at todays stock price.

KGHM - Polska Miedz, P/E=4.8 ttm, dividend 17zl that is 17% (for 2006 and the same for 2007)

All three above companies are large sector and regional leaders, stable, profitable and have consistent quarter after quarter revenues for the last 2 years.

Stan

S2S Tue 1-Apr-2008 11AM
1929, media and Lehman - what a garbage!

Breaking financial news from Europe today:

"Barclays bank is being taken over in a stock-swap deal by the Central Bank of Belarus for 0.02 Stg a share!"

More news

Marketwatch news.

Financials track Lehman higher after popular preferred offer

Comment: LEH rasing capital that they say the company doesn't really need (my foot!), dilluting their stock by 10%, and the "investors" are said to be buying the stock like crazy on the "good" news? On the same day USB declares another round of 19B$ new writeoffs (total above 38B$, quoting from memory) and their CEO resigns, yet the media say that the investors are supposed to be bullish on financials! Somebody will be left holding a bag... again!

When Nova Gold tried to do the same their stock collapsed from 11$ to 7$. I predict that LEH will collapse on the first next slightly less optimistic news, when people realize that today's rally was all based on lies and hype!

Stan

P.S.

There are 13T$ in mortgages in the US. If property is on average 20% down in 2 years, then how much is 20% of 13T$? Not all houses are under water so that is an overestimation of the exposure. How much is for example 5% of 13T$? Go figure, then add those unsaleable credit default swaps plus few other "Synthetic Investment Vehicles" and you get exactly the ballpark figure that Weiss is talking about. Trillions of $ in exposure not just a few hundred billions!

Note that even the old mortgages based papers backed by non-subprime loans and by properties that are not under water, will also go down too because the fixed income invstment always decline on rising interest rates. Credit injections won't work because banks will not lend at 2.25%+1%. Bank would have to lend now at probably 2.25%+10%! I predict that every large US corporation will eventaually line up at the Fed asking for those ultracheap 2.25% loans directly rather than going through the banking system and paying the market rates for loans! Federal Reserve have destroyed the private credit and loans market by holding the rates artificially low. They are compounding the problem unless they literally bought back every single fixed investment instrument that is already around! They would have to buy back the entire bond market and replace all bonds with the T-Bills which are cash-equivalent and these would probably start circulating around acting as a monetary cash substitute creating some very interesting effects! If they don't then holding the rates at 2.25% will make the entire bond market even less liquid rather than solving the bond market crash. The crisis is I think caused by the illiquid bond market caused by the unacknowledged dramatic fall in bonds' free-market value, rather than by a lack of credit. The governments are only making it worse by falsifying the rates!

Foodstamps queue, NYC, 2008
( the photo is from The Independent article )

S2S Mon 31-Mar-2008 10PM
Sorrysoft - conspiracy to annoy us till we give up?

About 1-2 months ago my computer became unbearably slow. About 2-3 times. Booting and the entire user interface. It became so annoying that I decided to risk even a full reinstallation if need be. I uninstalled about 10-20 last system updates including IE7 (I had to reset some internet and networking settings afterwards, since it wouldn't work initially but I fixed it). The speed returned back to normal as it used to be! Much faster! Unbelievable!!!

I would highly recommend to do the same! Oh BTW - disable the automatic update too. Something fishy is going on, for example my CD/DVD copying program Nero suddenly stopped working in a disk-to-disk mode a month ago around the same time as I allowed to install IE7. I do not believe that it is a random bug, I strongly suspect a conspiracy theory, that Microsoft is putting their DRM "features" a la Vista through the back door to old Win XP installations disguised as "security upgrades"!

S2S Mon 31-Mar-2008 2PM
Amazon short

Bought 4 puts against AMZN for May@50$ for 0.69$ each.

Note that if they (1) quasi-nationalize the banks then their profits MUST plunge and the entire sector index will decline. If they won't then (scenario 2) some of them will have to go bankrupt or get taken over for 2$ apiece. The only scenario when they will continue as is, would be (3) when US gov gives them 0.5T$ in 2008 and 1T$ in 2009, 1.5T$ in 2010 etc. In such a case the US dollar will be toast. So the proper play is to play the banking sector short and at the same time play US$ short (or long silver+gold) as a hedge against case #3.

More specifically (this is what I started doing since 2 weeks ago):

- accumulate SKF (Ultrashort Financial ETF) on dips

- accumulate Millenium Bullion Fund or GLD, SLV etc (gold and silver ETF's) on dips

That should in theory provide a winning bullet-proof combination in any case. Did I miss anything?

Stan

S2S Thu 27-Mar-2008 3PM
Canaccord

For the reccord. I am reading conflicting signals on Canaccord:

#1. Insider bying - very positive. Massive 9M$, 1M$ bought by management including CEO in the last 3 weeks only! Almost no
selling (0.2M$)

#2. Technical chart: very bearish, gradual but higher power law decline (non-linearily falling lower lows and lower highs, with
negative steepening slope). It has fallen by more than 50% already from the last year's peak of 25$ (it is now 10$).

#3. Bearish reccomendations: hold (8), underperform (3), sell (2).

#4. Very negative publicity and a serious probability of a class action law suit in near future, by their clients, stemming
from their involvement in the ABCP fiasco.

#5. Ambivalent situation with P/E: very good P/E=5 reflecting probably their last year's peddling of toxic papers to their
clients. However, it could also be very bearish if some of that windfall profit may be indicative of their own investments in
some "Synthetic Investment Vehicles" rather than the retail brokerage services. I somehow have a suspicion it's the former!

I do not understand the insider buying phenomenon! I am not getting it.   Are they cocksure that the lawsuit will not happen
or that they would surely win it?   What about the negative publicity?   In the falling market for M&A and LBO, can they afford
to cheese off their retail brokerage clients? Would you engage their services for yourself?   The publicity issue is NOT a
speculation or some probability! The publicity fiasco is already a fact!   It is already happening!

----

Reuters news, today

TORONTO/VANCOUVER, March 26 (Reuters) - Some individual owners of asset-backed commercial paper have hired a law firm that handles class action
suits to try to negotiate a better deal for them in the restructuring of Canada's C$32 billion ($31.4 billion) nonbank ABCP market.

Law firm Juroviesky and Ricci LLP said on Wednesday it has been retained by Brian Hunter, Ted Mcfeely and other dissatisfied retail ABCP investors, who
organized a group on the Facebook social networking Web site.
...
An estimated 1,800 retail investors were hit by the ABCP freeze-up last August, when concerns mounted about U.S. subprime mortgage-related assets. About
1,400 of the investors are clients of Canaccord Capital Inc (CCI.TO: Quote, Profile, Research).

This Canaccord saga intrigued me so much that I had to do some serious investigation (see page 1 and 4 ). It seems that the CEO was buying his company stock with the specific purpose that did not inolve greed nor fear, which may indicate an intentional action to support the share price rather than being a speculative. This is only my interpretation that may or may not be correct (typically correct in 3 sessions out of 4). In other words, the session result may indicate that Reynolds has been buying his company stock out of a sense of duty rather than believing in its recovery. True? False? We shall see!

Stan B.

S2S Wed 26-Mar-2008 9AM
More potential banking screwups(2).

Financial Times today:
"Hoarding by banks stokes fear over crisis", By Chris Giles and James Politi

Banks' borrowing costs - a sign of their willingness to lend to each other - in the US, eurozone and the UK rose again even after the Federal Reserve's unprecedented activity in lending to retail and investment banks against weaker than usual collateral and similar action in Europe.

Financial establishment thinks that if they don't use certain words the problem will simply go away! Another technique learned from the Soviet communists' media manipulation. It used to be called "interest rates"...

Let me spell it out:

recession = higher business risk = higher interest rates

2.25% interest rates = economic science fiction = government-manufactured paradise for large banks = "socialist" state for corporations = malinvestment = less business

-------

Stanley P. wrote:

I have read it . It is a plausible scenario and good arguments, but in distorted economy it may not happen.

I would like to point out two NEW FACTORS we have never talked about:

1. Japan major banks are not out of the hole yet. The Zombie, technically bankrupt institutions still exist. When US companies borrow yen in japanese banks they MUST provide a collateral (otherwise the interest would skyrocket) The value of this collateral may go down and the underlying asset may be worth less This means the Japanese banks who finance carry trade are vulnerable to an asset deflation in the USA

2. Chinese government is double dipping. ie. they print new yuan using US$ and US treasuries as an asset. If US$ is debased, it means yuan loses its "collateral" or relative "hard currency core" value. This means USA monetary inflation will be automatically exported to China adding up to their price and wage inflation. In short, since there is a peg of US$ and yuan/middle eastern currencies then any decrease in value of US$ index or US$ vs. commodities translates immediately into these currencies.

It means two things:

a) US problems may soon spread to Japan and China despite their massive trade surplus!!!

b) The US debasement may spread to China causing yuan debasement. Eventually it will cause increased inflation in China This will slowly translate into the cost of goods "made in China" for export to USA. The loop closes. We may get the East-West inflationary spiral. It goes like this: We print the credit money, they print the credit money to keep exporting to us, the real goods prices go up, the commodities cost more, good skilled workers demand more. Prices of finished good go up then the cycle repeats. The Asian economies keep their currencies from appreciating by buying treasuries and effectively shorting their currencies to finance the carry trade. By doing so they become vulnerable to the qualify of the collateral to the tune of $7,500 billion (your own estimate). But the Japanese banks have flaky balance sheets while the bank of China issued extra yuans using trade surplus as "gold" to back currency. They are as hooked to this heroin as JP Morgan and Citigroup.

SP.

Yes they are hooked to US Treasuries and each other's assets used as colateral or for currency backing. It's even worse: the assets are bonds = fixed yield instruments therefore the trend towards rising real interest rates (which is normal in a recession due to prevailing risk aversion) would automatically erode the principal values of those bonds! All bonds! That's why in my imagination (sick perhaps) I envisage a scenario where the governments would somehow protect those "assets" against normal market pricing pressure! Pressure towards lower asset prices and higher yields. I don't know how but I do know they will try very hard because the alternative is unthinkable (stopping printing presses and balancing the budgets!). Gierek [of Polish People's Republic 1970-1980] did it by simply keeping the "square" zloties out of the market thus perpetuating an illusion of value: for example company called "Unitra" used to produce transistors "sold" for 100-200 sqr zl [square zloty] apiece while paying 6 sqr zl per litre of gasoline. They couldn't lose - can you imagine the profit margin... [Note: when they opened up the market, Unitra fell and got sold off at scrap value in the first couple of months after 1989]

I can imagine that they can in the future swap the bonds and treasuries held by various central banks, for some other nicely named "securities" or new bonds that would be repriced in for example "World Peso" currency at 1:1 (like EastGerman Mark to West German Mark). Needless to say, interest rates or more properly termed the discount rate in "pesos" can happily remain at fictitious 2.25% almost indefinitely thus the "assets" may retain their principal value for ever. Sort of, for as long as the "pesos" won't suddenly trade on the open market or if they do, they will be only tradable by the selected 11 banks but not by you. And for as long as no gov would suddenly be tempted try to sell some of those 5 Trillion "assets" on the open market.

Another alternative would be to revalue gold to 5000-10,000$/oz, mint the new plastic 10 "peso" coins with 1.5-3 cubic millimeters of gold (and a chip) encapsulated and scrap all paper currencies.

Stan B.

S2S Tue 25-Mar-2008 9AM
More potential banking screwups.

This is an important article:

"BANKS: Bleeding Value And Hiding Desperation"
by Ronald R. Cooke, The Cultural Economist
Author, "Oil, Jihad & Destiny"
March 24, 2008

Quotes:

Bleeding

Under existing accounting rules, Banks can cook the books by claiming income long before actual cash comes in the door. Option loan income includes interest which has not been paid, but merely added to the balance of the loan. Earnings from mortgage backed securities can be booked as income long before they are earned. Banks have considerable flexibility when it comes to identifying the status of bad debt. Add these items up, and a bank may face asset losses that exceed reserve capital.

It would appear to be imprudent to claim this will be a short and mild recession. Conventional economics looks at dead data and assumes the numbers look good for a quick recovery. Cultural economists, like me, look at what is happening to consumer lifestyles. And that picture is not good. Higher food and fuel costs do force a reallocation of consumer financial resources. They will have to spend less on other non-discretionary purchases - like housing They will have less free cash to spend for discretionary purchases. A return to more conservative financing rules, and relatively weak real estate values, have effectively eliminated the use of home equity financing as a sort of savings account that can be tapped at will for more cash.

No. The collapse of our financial markets is not over. The value of debt financed assets (fixed asset deflation) will continue to deteriorate until intrinsic value roughly equals the underlying debt. Look for further declines in the value of:
* residential real estate (single family homes in one to four unit structures),
* commercial real estate (shopping centers, apartment buildings, office buildings, industrial properties, and land),
* mortgage backed securities and collateralized debt obligations (CDOs), and
* leveraged debt (including derivatives).

What determines intrinsic value?

For hard asset properties, two parameters. How much the buyer or renter can afford to pay per month, and the availability of lower cost alternative properties.

For leveraged debt: there must be an identified asset with a stream of income sufficient to cover monthly debt payments. If one can not determine the underlying asset upon which the income stream is based, then the paper is worthless. And that's is one of the problems with CDOs.

I will stick with my prior estimate: loan losses from all financial instruments will exceed $700 B
...

My comment:

Downward revaluation of the principal value of the fixed income investment paper translates automatically into higher yields which means that the real lending rates will also have to go up! Otherwise, if the fiction of low interest rates and high valuations of Western currencies (*) will be perpetuated by governments, the market will never became normal again and will eventually lead to an officially sanctioned dual currency dual economy like in the past, in communist Eastern Europe.

Note:

*) Paradoxically, the governments (West and East) are able to perpetuate a metastable balance where the interest rates in the West are kept artificially low and at the same time Western currencies are kept artificially high. That is being done by means of massive purchases of Western bonds by Eastern banks (e.g. Japan holds 5T$ of such "assets", China 1.5T$, other Asia probably ~1T$). Another reason that made perpetuation of low interest rates in the West possible was distortion of the risk management - business risk was perceived to be artificially low because very few large companies were allowed to go bankrupt whenever they should have gone bankrupt. The lack of corporate bankruptcies and distorted balance of East-West trade are the main problems. Under the hypothetical future balanced trade situation, Western currencies would - sorry - will fall and their interest rates (lending, discount and yields) will go up reflecting the real risk of doing business.

Stan B.

----------------------------------

Subject:         Re: Potential US screwups
       Date:      Tue, 25 Mar 2008 08:41:40 -0400
      From:       Stan B.
      To:            Stanley P.

Re: Banks and thrifts are also likely to take more write-downs
on both agency and non-agency securities in the quarter, as the
lack of liquidity in fixed income markets is pressuring prices
for mortgage securities, Miller said.

That's what the other 50% of analysts ("bezpartyjni" [non-party members]) write too! It seems that the market for fixed income paper became illiquid (at the prices that they want to sell them) yet the full size of the bank writedowns and the true revaluation of all their collateral and assets has probably not yet been fully done. All they did (only partially to that) is marking down their subprime mortgage backed assets, which is only a small portion of toxic bonds that they have been consuming all those years. The true extent of financial exposure and the real risk is hard to estimate (certainly hard for me, except for the "prophetic" dreams of course...). See for example this article, which BTW is a bit extreme too but it does rise valid questions and shows how much information is being glossed over while TV is presenting us with always the same standard picture ("stal sie leje moc truchleje" [Polish saying; typically in the communist countries, TV news used to show molten steel production every second day, which became the proverbial news filler like Paris Hilton here (sorry P.H.)] ):

Stan

"Cliff Notes on Financial Maelstrom" By Jim Willie CB, Mar 20 2008 10:48AM

-----------------

Stanley P. wrote:

IndyMac (IMB.N:) Underperform estimated 2008 EPS -$1.70 Target $5
Washington Mutual (WM.N: ) Underperform $9 -- -$1.15 target $9

"We consider the industry under-capitalized and expect that
necessary capital raises will dilute common shareholders."

Banks and thrifts are also likely to take more write-downs
on both agency and non-agency securities in the quarter, as the
lack of liquidity in fixed income markets is pressuring prices
for mortgage securities, Miller said.

The analyst expects book values to be reduced by negative
mark-downs on securities portfolios in the first quarter. He
estimated that agency MBS will be marked down by 1 percent to 3
percent, and non-agency MBS by 15 percent to 20 percent.

"Potential marks are more significant for IndyMac Bancorp
(IMB.N: Quote, Profile, Research) than the industry as a whole," Miller said. He said 86
percent of IndyMac's $7.3 billion MBS portfolio was non-agency
securities, and just 1 percent agency securities, while most
companies have largely agency portfolios

S2S Sat 22-Mar-2008 7PM
Unprecedented risk to Canadian financial system! (2)

Dozent (Stan P.) wrote:

Czesc.

I am slowly grinding through this affidavit. It is hard as I am not accustomed to the language and not really this interested in details of very exotic financial instruments. However, I acknowledge the risk that "not knowing" poses to my investments. I have a question and a far-reaching comment:

1. I understand the LSS swap defaults were triggered by customer proprietary formula. Yet this is only a trigger. There MUST be a way to evaluate each transaction based on the contract itself otherwise the contract does not make sense. ie. in order for (re)insurance company to pay for a broken leg a certified doctor must attest the leg is broken and send a bill to the "customer" HMO (health management organization) who is also their insurer. When the "customer" requests the LSS claim payment, how do you know the claim is legitimate. Ie. How do you know the mark-to-market value when there is no market??? How JP Morgan has determined that 90% of the contracts are truly "under water"?

2. The LSS default triggers are to be replaced by "higher spread-loss triggers". Yet, as I understand the insurance contracts remain intact. In order for the restructuring to be successful a) banks must provide more collateral b) the new triggers can not be triggered. Here is the catch: what will happen if these higher triggers actually get triggered some day. This restructuring reminds me of a roulette player, who put $26 billion on red and lost. So he proposes "I will double the pot, throw in my shirt and lets play again". The Casino has already won. They know the client is broke, but if they want the to get their money they have to agree for another play. If the player wins, he goes home with no loss and a shirt on his back However, if he loses, he loses twice the money. He has to sell his car and his wife will request a divorce. The new triggers cannot be un-triggerable because the "group 3, customers" would never agree. After all they are insured against the credit losses and they need to know when they start losing money. The new triggers are not triggered yet (attested by JP Morgan at 0%) yet they CAN be triggered if the credit markets deteriorate further. Except then the banks would lose ($26+$15) billion. Normally a debt restructuring means: "I know you can not pay 30% loan at 8%, so lets make it a 50 year loan at 4%. Can you afford to pay it?" What Crawford proposes means "lets increase the deductible (ie group 3 risk of a small loss) and the pot of money (risk to group 2) and allow group 1 to stay in the game". The reason to do it is to avoid inevitable lawsuits from group 1, investors, who invested in "risk free" AAA securities

I think this is nuts. When you lose your fun money on a rigged game, you do not throw your shirt, your car and your wife into the pot. You simply walk away swearing you will never to come back to this "szulernia" [gamblers' den] . However, if this proposal passes and the game goes on, then shorting the banks now is a losing proposition. Instead, one has to watch and wait for an indication of an actual default-triggering events.

In addition Crawford assumes that under new rules the healthy market for LSS swaps will develop. What if it does NOT? What if the market players decide "new rules, old rules, this game is rigged".

Yes, it is a danger to the financial system, a danger from the legal system for fraud ie. selling crap as "aaa securities". The proposal may still leave group 1 with nothing, group 2 with double losses and group 3 with years in the court room with group 2. Brrr...

I am not going to put any money on banks. Short or Long. Not now! Not yet! This is a crap shoot, not an "investment".
Stanley P.

S2S Thu 20-Mar-2008 2PM
Unprecedented risk to Canadian financial system!

136. As I noted at the outset, this is a restructuring of unprecedented scope, magnitude and complexity in Canada. It is unprecedented in sheer size, but also in the magnitude of risk to the Canadian financial markets and participants.

Crawford's affidavit, 19/03/2008

Introduction: 20 Canadian investment funds (called "conduits") comprising about 32B$ of total assets, were declared bankrupt by Court around 17-18 of March.

Quotations from Purdy Crawford's affidavit (dated 17-Mar-2008, published 19-March on Ernst Young)
A must read:

However, the vast majority of underlying assets (being approximately $26 bilion) [OUT OF 32B$ TOTAL!!!] are derivative contracts (also referred to as "synthetic" assets) in the form of credit default swaps ("CDS").
...

39. A CDS is a contract under which one party (the protection buyer) seeks to protect itself against a defined credit event or pool of credit events. The protection buyer pays fees to the other party, the protection seller, who undertakes to pay the protection buyer if a credit event occurs. The payment is based on a formula in the CDS contract. The protection buyer may require the protection seller to post collateral as security for its obligations.

40. A significant number of the Conduits hold CDS contracts, under which they are the protection seller, receiving fees, and are obligated to the other party as protection buyer (here, the Asset Provider) to provide protection against defined credit events and to provide security. The security interest of the protection buyer takes priority over the interest of the ABCP investors.

I have to comment it: if I understood that correctly (BTW Crawford has a surprisingly clear and good writing style for a lawyer!) those funds ("conduits") not just "hold" those derivatives as their assets, they may apparently be also the actual guarantors (?) or providers of these CDS default guarantees to the parties (called "Asset Providers") that bought those guarantee! In addition, obligations stemming from those CDS'es take precedence over the investors-shareholders who bought those founds!!! Dozent, do you realize that the total value of those obligatory guarantees are not only impossible to predict accurately (being de-facto insurance contracts) but they may potentially pose a much higher liability if market collapses, than just the nominal 32B$!!! Plus, in addition, those CDS and LSS contracts were backed within those funds by other CDS/LSS contracts used as "assets"! Am I reading it correctly, what do you think about it???

41. Of the $26 billion in synthetic assets underlying the ABCP, approximately $17.4 billion of these assets are a particular kind of CDS, namely "Leveraged Super Senior" ("LSS") swaps. These swaps are "leveraged" because the amount of credit protection sold is greater than the amount of collateral posted as security for the protection seller's obligations. Most of the LSS swaps contain triggering events ("margin triggers") that entitle the protection buyer to make calls for additional collateral ("margin calls") from the protection seller to ensure that the protection buyer continues to have sufficient security. On a margin call, the protection seller is required to pledge additional collateral to secure its obligations to the protection buyer.

42. Most of the triggers in the LSS swaps are based on the variable "market value" of the swap. These are called "mark-to-market" triggers. Under these swaps, the protection seller would be required to post additional collateral based on an increase in the amount the protection buyer would have to pay to a third party in the market in consideration for an agreement to enter into a replacement swap that would effectively preserve the economic value of the current swap for the protection buyer. Mark-to-market triggers allow the Asset Provider (in its capacity as counterparty or "protection buyer") to call for more collateral if the mark-to-market value of the LSS swap has deteriorated to a prescribed leveL. Calculations of mark-to-market valuations of swaps are highly complex, may be based on proprietary models owned by the protection buyer and may have subjective elements.

43. The majority of the financial assets held by each Conduit that entered into LSS swaps in respect of a series of notes have been pledged to the Asset Providers as security. Accordingly, the LSS swaps are secured obligations of the Respondents. The security interests of the Asset Providers have priority over the security interests of the investors in the pledged assets. If a secured swap is declared to be in default (for example, if a margin trigger is reached and the required additional collateral is not posted), the Asset Provider has the right to terminate the swap and satisfy any termination payment which thereupon becomes due to it by enforcing its security through seizing and liquidating the collateraL. The amount of collateral needed to satisfy the termination payment will depend on the market conditions at the time. If market conditions were sufficiently depressed, the ABCP investors holding notes of those series could be at risk of significant losses because the value of the assets that support their notes would first be used to meet any shortfalls incurred by the Asset Providers.

44. The JPMorgan Report analyzes the trigger default risk as at March 4, 2008 absent a standstill and restructuring.
It concludes that almost all the triggers of the LSS swaps, about 94%, would have been breached or were within 10% of being breached on that day. This means that about $ 15.4 billion of collateral would have been at immediate risk of being seized and sold. As discussed in more detail below, a restructuring of the triggers is integral to the Plan. The JPMorgan Report shows that as of the same date, March 4, 2008, none of the restructured triggers proposed as part of the Plan would have been breached. JPMorgan discusses the new triggers in greater detail in its report.
...
76. A fundamental flaw of the ABCP market that contributed to the loss of investor confidence and the market freeze was a lack of transparency. Without access to meaningful information about the assets that underlie an ABCP investment, there can be no meaningful improvement of the market for that investment.
...
80. The Asset Providers have agreed to change the triggers under the LSS swaps from mark-to-market triggers to more remote (or higher) spread-loss triggers ("Spread Loss Triggers"), which will reduce the likelihood of margin calls and any consequential forced liquidation of assets to fund termination payments. As well, mark-to-market triggers may be subjective and based on an Asset Provider's proprietary model; by contrast, the Spread Loss Triggers will be based on six uniform and verifiable indices of spreads and losses. Therefore the change in the
triggers will not only reduce the risk of margin calls but also increase transparency, predictability and certainty. This will enhance the likelihood that a more efficient secondary market will develop.

81. The change in the triggers reduces the risk for investors but increases the risk borne by the Asset Providers. They therefore require greater security. The Plan transfers all of the assets of the ABCP series backed by synthetic assets (including those backed by both traditional and synthetic assets) into two master asset vehicles ("MA Vs") that will be created on implementation. The pooling of assets provides greater collateral, making collateral calls less likely. The collateral will include non-levered synthetic and traditional assets that underlie the ABCP of those series that are backed by such assets. This was not the case earlier.
...
110. The Asset Providers require comprehensive, effective releases in return for their agreement to:

(a) enter into new LSS swaps with spread loss triggers whose terms are more favorable to the investors than those in the current swaps. The change in these triggers has been discussed above and in detail in the JPMorgan Report as well as the Information Statement. The restructuring is premised on the change in these triggers. This change results in a shift of risk from the investors to the Asset Providers that is meaningful and substantial and that will help protect investors from the negative effects of volatile credit markets;

(b) provide Margin Funding Facility support at rates significantly below the cost another third party would charge for such funding in the marketplace, assuming (which is not at all clear) that the full Margin Funding Facility could even be arranged with a third part in the current economic environment; and

(c) immediately upon the granting of the initial order, disclosing information concerning the synthetic assets to create transparency, facilitate the restructuring and assist investors in assessing the Plan.

114. I have spoken to many investors since I became Chairman of the Committee. I understand every investor has experienced difficulty and some have experienced hardship as a result of this crisis. Some investors believe they have rights to sue parties on account of their losses which rights the releases will take away. Some have told me they support the financial aspects of the Plan, but do not wish to release the parties they believe should be held responsible to them for their losses. I also understand that they consider that some of those parties are not making a substantial contribution to the Plan. I understand these views. However, negotiation of the Plan has been the art of the possible. Key participants who are making a substantial and necessary contribution require the releases. Simply put, there can be no Plan unless these releases are included, and I believe that the benefits of the Plan, taken as a whole, justify the releases.

116. The Asset Providers and Canadian Banks have asked for a stay of actions against them during this process. If the Plan is implemented, claims against them will be released in any event.

S2S Sun 16-Mar-2008 10AM
Picking a suitable Canadian financial dinosaur to eat?

Let us zoom onto:

1) National Bank of Canada,

2) ATB Financial,

3) Transat A.T. ("Air Transat")

My favored pick would be Transat! I promised myself to get back at them ever since they stranded me in Dublin!(*)

http://www.bloomberg.com/apps/news?pid=20601082&sid=aEwmoTZvxjYU&refer=canada

The Caisse, Canada's biggest pension-fund manager, is the largest holder of non-bank issued commercial paper, with about C$12.6 billion. Other large holders include National Bank of Canada, the country's sixth-biggest lender, ATB Financial, an Alberta bank, and Transat A.T. Inc., a charter carrier.

Must remember to protect myself (buying a call option) and off we go hey ho ...

Regards,
Stan

-----

*) Rule #1 = never never never follow emotions in investing! Use intuition and prophetic dreams (kidding ) - not emotions! The real key is that oil is also playing against them!

------------------------ full text ---------------------

Investors' Group Misses Canadian Debt-Plan Deadline (Update1)

By Doug Alexander

March 14 (Bloomberg) -- An investors' group working on a plan to restructure C$32 billion ($32.2 billion) in Canadian commercial paper that hasn't traded in about seven months will ask the court to call a meeting with noteholders next week after missing today's deadline. The group, led by Toronto lawyer Purdy Crawford, said today in an e-mailed statement it will file the application in the Ontario Superior Court of Justice in Toronto on March 17 for investors of 20 affected trusts. ``We see no reason why we would not be in a position to file and are confident that we will be able to submit a plan for a comprehensive and simultaneous restructuring of all affected ABCP that will be beneficial to all noteholders,'' Crawford said in the statement. The group said Feb. 29 it would send the proposal to noteholders by March 14 so they could vote on the agreement by mid April. The plan to swap the short-term debt for longer-term notes requires support from two-thirds of investors. The process is supposed to be done by the end of April.

Ground to a Halt

``No matter how far they delay this thing, it will get done,'' said Daryl Ching, managing partner with Clarity Financial Strategy, a Toronto firm advising companies holding commercial paper, in an interview before the release. ``There's enough incentive from enough parties to bail this thing out.'' Canada's market for asset-backed commercial paper sold by non-bank dealers ground to a halt in August after Coventree Inc. and other trusts failed to renew maturing debt because investors were worried about ties to U.S. subprime mortgages. A group of foreign banks, Canadian lenders and pension funds led by Caisse de Depot et Placement du Quebec negotiated the so- called Montreal Proposal on Aug. 16, where banks wouldn't demand collateral from the affected trusts and those funds wouldn't ask banks for emergency funding. That standstill agreement has been extended today, the fifth time since October. The pact has been in place while a committee led by Crawford, and made up of the biggest holders of the debt, has been working to restructure notes that mature within 364 days. The group released an ``agreement in principle'' on Dec. 23, which proposed that commercial paper be swapped for new notes with average maturities of seven years.

New Notes

The notes will be restructured differently, depending on the type of assets underlying the funds. The agreement includes a C$14 billion credit facility supported by institutional investors, foreign banks and Canadian lenders. The Caisse, Canada's biggest pension-fund manager, is the largest holder of non-bank issued commercial paper, with about C$12.6 billion. Other large holders include National Bank of Canada, the country's sixth-biggest lender, ATB Financial, an Alberta bank, and Transat A.T. Inc., a charter carrier.

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net
Last Updated: March 14, 2008 20:08 EDT

S2S Sat 15-Mar-2008 7PM
US Government's new concept of a wealfare state for bankers.

http://www.netcastdaily.com/broadcast/fsn2008-0315-1.asx

Listen to 11-th minute. Can't? Haven't got the headphones? Too bad...

New "Cynk" [tip] from Puplava:

Merril Lynch and Lehman Bro.

Lehman has just asked and got 2B$ of emergency unsecured credit and Puplava said that he saw some credit data on both
institution. Interesting. I missed Bear Stearns but I am going to get my gear ready for those two and for the "Bemo"

Stan

-----------------------

http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/03/the_fed_and_carlyle.html

In fact, it's arguable that the banks' seizure of Carlyle's $20bn-odd in assets has actually been encouraged by the Fed's mortgages-for-Treasuries offer. Because the Fed new lending emergency lending facility allows the banks to swap mortgage-backed debt for Treasury Bills in a way that Carlyle could not do.

S2S Wed 3-Oct-2007 11AM
Discussing Fekete's article and "square" versus "round" dollars (Skype log)

[10/2/2007 10:27:48 AM] dav0 says: A. Fekete "Can we Have Inflation and Deflation All at the Same Time?" http://www.kitco.com/ind/fekete/sep282007.html He is brilliant, his writing is illuminating

Stan B. says: I am just looking at it. Fekete is fascinating writer, old Hungarian school (Margo said "fekete" means "black")

He said that Bernanke couldn't drop money even if he wanted to. All he can do is 'create' electronic money and give it to banks.

He is correct but do not underestimate the power of governments to print money!

It seems that the only safe haven fro the crunch will be gold

US Federal Reserve cannot print paper money but they can issue credit to China and China can print money for them! That what they have been doing all along! There are always ways around! Government will never run out of money.

With a trade deficit over 3/4 trillion, how much longer for?

I have seen a destruction of monetary system in Socialist Poland in the 1970-1989. They key feature of monetary interventionism is the creation of dual currency system. The "square" dollars (used between a central bank, banks and large corporate clients) , and the "round" dollars that are used in dealing between the individuals and circulates as cash, notes and coins. We are witnessing massive inflation in "square" dollars and small deflation in "round" dollars

you mean treasury notes?

Treasury notes [and government bonds, in general] are part of the "square" dollars however issuing such notes drains market off of the "round" dollars! When Fed buys back their own Treasury Bills [gov bonds] they can then issue cash back (round dollars) into the system. Thus selling T-Bills by Fed is round-deflationary and square-inflationary! ...

I am trying to read more about capital and markets to understand the 'nature' of money

... while buying [back their own] T-Bills by Fed is square-deflationary and round-inflationary!

ok got you

The system is not tight, there is a leakage from square into round...

They need gaskets! Square ones with round holes in the middle.

They do, but they do not control China! Chinese can accumulate square dollars (as T-Bills and ABCP [Asset Backed Commercial Paper]) and then print round Yuan (cash) releasing it into Chinese and Asian markets. Therefore you have a rampant consumer goods inflation everywhere in Asia, except Japan. As long as the US controls round dollars tight there can be no gold surge. The interesting side effects of square inflation is extreme overvaluation of corporate valuations, and the consequence of round deflation is the lack of credit for small business and individuals (with the only exception of mortgages in the US and Europe ([available only] until very recently). I believe that the US gov will not be able to restrict the supply of round dollars for ever! I have seen that in Poland. In 1975 a transistor BC108 cost 100-200 zl which was ~1/10 -th of an average salary! because BC108 was in square zl [zl=Polish Zloty] while salaries were in round zl! Another example, GM is worth about 300B$ in squares while it's real worth in round dollars is probably zero!

...
Fekete says: "In a few days during the month of August central banks of the world added between $300 and 500 billion in new liquidity in an effort to prevent credit markets from seizing up. The trouble is that all this injection of new funds was in the form of electronic credits, boosting mostly the top layer where there was no shortage at all. Acute shortage occurred precisely in the lower layers." - this I think illustrates what I was talking about, quite well! The cause of the property bubble in USA and in Europe was that re-mortgaging was the ONLY source of [round dollar] credit, that is the only way individual people and small businesses could convert overabundant "square" dollars floating in the corporate finances into more real "round" dollars!
...

S2S Wed 26-Sep-2007 7PM
Prediction of Bond Market Crash on 26-Sep-2007; Black Wednesday ? (follow-up)

S2S Thu 6-Sep-2007 2PM
Prediction of Bond Market Crash on 26-Sep-2007; Black Wednesday ?

...The numbers represented some pricing, probably currency exchange rate or value of some asset, day by day. The prices showed in rational notation (like British measures) between 4 and 1/2 to 4 and 3/4 (that is 4.5-4.75) up to the date of 26 September. Just at or after that date the prices jumped up to 11 and then 13.
Stan B.

Comment:

That prediction was obtained through dream work (not remote viewing!) on 3-Sep-2007. I am not 100% certain what those numbers represented even though I used the term "prices", but it felt as it was something related to the financial market. The most likely match seems, in my humble opinion, to represent some bond yields in percentage, and therefore are indicative (logically) of a possible bond market crash by two third in value (-65%).

I don't know how to short bonds but I bought some Proshares (Ultrashort Financials) and some put options against Goldman Sachs.

To view previous StainInvest blog click here:
Previous

Stan Bleszynski

1668 Lakehurst Rd.(Buckhorn), Lakefield
K0L2H0, ON, Canada
(705)657-2419 Fax (705)657-8157
http://www.ptbo.igs.net/~stanb
stanb at ptbo.igs.net

THIS IS PRIVATE WEB PAGE, COPYING AND LINKING PROHIBITED EXCEPT BY AUTHORS' PERMISSION.
Copyright: Stan Bleszynski, 2003-2007