Posts from — July 2007
Consumer Confidence Hits 6-Year High
Consumer confidence hit a six-year high in July, a widely watched gauge of sentiment showed on Tuesday, as Americans shrugged off falling home prices to focus on a healthy jobs market, instead.The New York-based Conference Board said that its Consumer Confidence Index, rebounded to 112.6, its highest level since August 2001 when it recorded a 114.0 reading. That compared to a revised 105.3 in June. The July 24 cutoff for the preliminary survey of 5,000 U.S. households was before last week’s stock market tumble, however.
July 31, 2007 No Comments
Blackstone – Worst IPO This Year
This IPO failure has put countless other PE IPOs on ice. Years from now this will be thought of as the beginning of the end for the money shufflers. All downhill from here:
Blackstone’s shares, currently at $24.50, have now fallen 21 percent from the $31 they debuted at last month. That means the stock is the worst-performing IPO of more than $500 million this year, according to this Bloomberg story. That represents a $7 billion loss in market value. (If you consider that the stock went as high as $38 on its first day of trading June 22, it has dropped a stunning 35% in value.)
By contrast, the 10 biggest U.S. IPOs in 2007 have returned 14% on average in their first month of trading, according to Bloomberg. The S&P 500 Index has risen nearly 5%.
July 30, 2007 No Comments
Three Rules to Buying Resource Stocks
From Rick Rule, quoted in the Daily Reckoning:
First, you have to be contrarian. You have to buy them when others don’t want them.
Second, you have to buy the good ones. Most resource companies are run by incompetents, he says, or worse – “people who would normally wear a mask when they go to the 7-11.” The 80-20 rule applies here as elsewhere. Only 20% of the companies will make 80% of the profits. And the 80-20 rule applies to the 20% too. So only 20% of the 20% of companies will make 80% of 80% of the profits. You have to do some serious research and analysis to figure out which those companies are.
“I look for serial and sequential winners,” says Rick. “I look for the people who have proven that they can produce profits.
Finally, Rick says you need to look for projects in places where most people don’t want to go. Political risk is always a problem for resource companies. But the political risk is not what most people think. Most investors judge the risk high in the Congo, or in Mayanmar, and low in California. “Actually, the opposite is true,” Rick explains. “California is so rich that it can afford to treat mining projects badly. But these poor, basket-case countries need them. They are much more respectful to miners.
July 27, 2007 No Comments
Stocks Down Worldwide
Bloomberg
Stocks tumbled around the world and U.S. Treasuries rallied on concern higher borrowing costs will slow takeovers, spur debt defaults and curb earnings, prompting investors to flee riskier assets. The Standard & Poor’s 500 Index fell to its lowest in three months, while Europe’s Dow Jones Stoxx 600 Index dropped 2.7 percent, its biggest retreat since March. Benchmark stock indexes in Brazil, Mexico, Argentina, Korea, Poland, Russia and Turkey slid more than 2 percent.
July 26, 2007 No Comments
Libya to join international markets
For several years now, six Bulgarian nurses have stood accused by the Libyan state of infecting hundreds of patients with HIV. Ergo, said the Libyan government, they must die.
Libya was not exactly forthcoming by international standards, and the EU has frothed with outrage for years, refusing to do any business with Libya until the case was resolved in a mutually credible manner. As Libya has surrendered its WMD programs, paid reparations for the Lockerbie terrorist attack, opened its borders to foreign investment (without confiscating it), and drastically improving its behavior towards the West in general, the European Union has continued to reject any dealing with Libya until the case is resolved.
Libya has finally allowed the nurses to be repatriated to Bulgaria, under the pretense that they can “visit their families” before coming back to Libya to spend life sentences in jail (as opposed to death). That won’t happen, the case is effectively closed, and business between Libya and the West will now begin in earnest.
Expect Libya to experience a major bull market in everything over the next decade.
July 25, 2007 No Comments
An ill omen in Bogota
Colombia has smashed Latin American investment records in the past year. The tacit understanding between Alvaro Uribe and powerful right-wing paramilitary forces has granted Uribe enormous leverage in both throttling Colombian left-wing paramilitary forces and in reintegrating right-wing, AUC footsoldiers back into Colombian civil society, through a disarmament/ amnesty program.
Colombia’s “justice and peace law,” which essentially diluted sentencing for militia fighters, was apparently thrown out by the Colombian Supreme Court yesterday. AUC leaders have subsequently pulled out of the cease-fire understanding that previously existed between them and the Colombian government.
Investors should shy away from Colombia until the Colombian Supreme Court’s decision is somehow annulled, or the law reinstated. If it is not, the only investors who stand a chance at profiting from a society at renewed war with itself will be weapons manufacturers.
July 25, 2007 No Comments
Existing Home Sales Fall To Five Year Low
The trend is inexorably downward.
July 25, 2007 No Comments
Adverse Selection 101 – Single State Universal Health Care
How would a universal health care plan work in practice in the US. Wisconsin adds another chapter in the many decade history of failed socialism. From the WSJ Op/Ed page:
As if that’s not enough, the health plan includes a tax escalator clause allowing an additional 1.5 percentage point payroll tax to finance higher outlays in the future. This could bring the payroll tax to 16%. One reason to expect costs to soar is that the state may become a mecca for the unemployed, uninsured and sick from all over North America. The legislation doesn’t require that you have a job in Wisconsin to qualify, merely that you live in the state for at least 12 months. Cheesehead nation could expect to attract health-care free-riders while losing productive workers who leave for less-taxing climes.
Proponents use the familiar argument for national health care that this will save money (about $1.8 billion a year) through efficiency gains by eliminating the administrative costs of private insurance. And unions and some big businesses with rich union health plans are only too happy to dump these liabilities onto the government.
But those costs won’t vanish; they’ll merely shift to all taxpayers and businesses. Small employers that can’t afford to provide insurance would see their employment costs rise by thousands of dollars per worker, while those that now provide a basic health insurance plan would have to pay $400 to $500 a year more per employee.
July 24, 2007 No Comments
Boiler Room 2007 – Forward Forex’s Currency Ripoff
This NFA compliant is a fascinating read and highlights the poor use of resources by financial regulators. Instead of going after the blatantly criminal activity highlighted here, they prefer to get celebrity scalps for accounting technicalities and Section 1001 violations. Martha Stewart gets the headlines, but the faith the ability of the regulators to control the market is damaged much more by firms like this.
Take one part Boiler Room, one part that Sopranos episode with the stock brokers and two parts ‘Born to Steal’ and this is what the result would be. Ruthless currency options brokers targeting unsophisticated investors without even a nod to following regulatory guidelines.
The firm listed in the complaint, Forward Forex, had only 162 customers in six months but managed to bring in revenue of over $3.6 million. Just like the movie Boiler Room the brokers would not let go once they had their claws in someone. In one case the Forward Forex broker urged his client to, “take out a second mortgage on his home, or withdraw retirement savings, or take an advance from his American Express credit card, in order to invest additional funds.”
The sales pitches are almost beyond belief and unfortunately so is the fact someone would fall for them. Anyone who has seen Boiler Room will recognize the basic tactics. These manipulations are as old as the hills and still work frequently enough that these boiler rooms can open and be shut down over and over.
How to get them on the line:
The information itself was unimportant. The brochures were sent so the broker would have a reason to contact the client.
Boiler Room:
The info we send is bullshit. The important part of the call is telling them you have that one great idea, and that a broker is going to call them back in a month.
Forward Forex:
Cohen also sent Colley a brochure regarding risk, but told Colley that the risk information was for another type of investment and was not relevant to forex. He added that the risks involved in the products that he was offering to Colley were minimal. In fact, Cohen told Colley that forex options were less risky than Colley’s investments in the stock market.
Element of Urgency:
ABC. Once they were on the line, clients had to be closed quickly. If they had time to think about it, or do even minimal research, they might change their mind. By forcing a quick decision clients would become confused, pliable, and acquiescent to the brokers demands.
In nearly every violation noted in the NFA complaint there was an element of extreme urgency in the pitch.
Boiler Room:
CHRIS
That's great, Doc. If you want to missyet another opportunity here and gowatch your colleagues get rich doingclinical trials, then don't buy a shareand hang up the phone.DR. JACOBSWell hold on a second. I didn't saythat. I just wanted to talk more aboutit.CHRISHonestly Doc, I don't have the time.This stock is blowing up right now.The whole firm is going nuts. Let meopen the door to my office.You hear that? That's my tradingfloor, Doc.Now I have a million calls to make toother doctors who are already in theknow. I can't walk you through thisright now. I'm sorry.DR. JACOBSOkay, okay. Let's do this.
Forward Forex:
When Blauch informed Deruiter that he earned a profit on his initial investment, Blauch told Deruiter that in order for Deruiter to capitalize on the extraordinary opportunities in the markets he needed to add additional funds quickly.
…
Blauch told Herickoff that he had access to information from the government about currency movement that only the biggest banks knew and that Herickoff had to act immediately if he wanted to have any chance of profiting from this information’
Selling the Dream:
The idea of Selling the Dream is that a pitch centers on the stuff the client will be able to acquire if he goes through with the trade. Talking about what could be purchased makes the gains more tangible than a focus on dollar amounts. While all brokers do this to some degree, Forward Forex took it much farther than most.
Boiler Room:
SETHI remember you saying something aboutbuying a house, right?HARRYYeah.SETHWell, how'd you like to pay for ittomorrow... in cash?
Forward Forex:
The unknown Hamlin Mercer sales person told Fish that it was not unusual to see a $15,000 investment turn into $60.000 and promised Fish to put a Ferrari in his front yard.
Anything for a sale:
Insults, yelling, pleading, anything goes.
Boiler Room:
SETH
Listen, if you couldn't pull threethousand together your name wouldn't beon my desk during business hours. Whatdo you mean you don't have it? John,please, you're embarrassing me. I'mpitching you from under my desk. I'membarrassed.
Forward Forex:
Blauch also told Herickoff that his account was far too small for Blauch to waste his time on. Blauch told Herickoff that if he did not add another $25,000 to his account immediately, Blauch was not going to work with him.
Doubling Down:
The brokers always come back demanding more. If the first trade went well, “hey lets make some REAL money now,” if not, “we’ll double down and make it up on the next one.” Once they have a client marked they would not give up calling him. With only 162 clients they had to squeeze them hard to keep the firm going.
Boiler Room:
SETHRight, and it's still going there,probably even higher now. This doesn'tchange anything except that you'regoing to make more money than you didbefore. Look Harry, I liked it ateight, I love it at four. It's anaverage down for you.HARRYWhat?SETHDollar cost averaging. If you own ahundred shares at ten dollars and nowyou buy another one hundred at five,that's a F200 shares at $7.50 a share.Your cost basis is lower. Now if I getyou involved at ten and take you out atfifteen, you've made how many pointsHarry?
Forward Forex:
Canter told Eggers that his account was doing exceptionally well, and that it would be foolish not to take further advantage of these favorable markets. Canter even encouraged Eggers to take out a Second mortgage on his home, or withdraw retirement savings, or take an advance from his American Express credit card, in order to invest additional funds.
Coming home to roost:
When the scam finally beings to fall apart, the brokers who never stopped calling are suddenly unreachable, by then the money is gone and several months later the regulators might get around do doing something about it.
Boiler Room:
HARRY(almost crying)Listen Seth, I'm in a heap of troublehere. I need that money back. I wassupposed to use it for a down paymenton a house for my family. We're goingto lose the house now.SETHHarry, listen, it's going to rebound.HARRY(screaming)Seth!! I need the money back!!!SETHI'm sorry. I can't do that. I have togo.Seth hangs up the phone. He looks very disturbed.SETH (CONT'D)If he calls back, I'm not here.
Forward Forex:
Customers Willingham and Hammersmith were unable to reach Blauch or anyone else at Hamlin Mercer, for days at a time. All the while, their open option positions were nearing expiration.
…
Hammersmith – after being unable to contact Blauch – tried to reach Winters, his original broker. The receptionist at Hamlin Mercer refused to connect Hammersmith to Winters, telling him that Winters was no longer his broker and that he would have to speak with Blauch. Hammersmith also contacted Freedberg, who told him that Blauch had had a heart attack and was at a hospital in Minnesota. Freedberg said that Hammersmith was not going to be able to contact Blauch again. When Hammersmith asked whether he could be connected to Winters, Freedberg stated that he did not even know who Winters was and added, “Sorry, but this is the chance that you took.”
So far the NFA has only filed a complaint. It’s too little too late for the customers of the firm, over 90% of them have lost money, likely for good, so this won’t have a happy ending. Yet it will still be better than the alternative ending to Boiler Room. If you have the DVD you can view this:
Seth comes out of the building and heads to his car. As soon as he begins to cross the lot he notices a man coming toward him. It is HARRY. There are walking right towards one another. Harry accidentally drops his briefcase. The contents spill onto the floor. Seth bends over to help. He nervously looks around as he helps Harry, waiting for the Feds to show. Seth unknowingly picks up the gun case and hands it to Harry. Harry is very gracious. HARRY Thank you so much. SETH (smiling genuinely) No problem. CUT TO BLACK.
July 23, 2007 No Comments
Is the Fed Thinking About Inflation or the USD?
John Crudele’s theory is that Bernanke is focused on the strength of the USD and using inflation as cover to take rate cuts off the table. Until Americans go on vacation they are typically unaware of shifts in currency strengths. It would take dramatic decline in the strength of the USD for most Americans to pay attention – a situation Bernanke wants to avoid. Like a man falling out of a high-rise window and giving a status update at every floor, it’s “so far, so good”:
Despite too many problems to go over again here, investors are having their annual summer romance with stocks and the Dow Jones industrials could easily hit the 15,000-level by September.
But inflation is a funny thing. Like the ugly baby, you can deny its existence even as it is goo-gooing you in the face. But eventually the truth will come out.
July 20, 2007 2 Comments
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