Insiders cash out --- RAMS joins the queue

Well what can you say. Australian property has aways orbited around the business cycle, as it should, like a planet orbiting a star in a ellipical orbit the gloden rays of profit have ebbed and flowed like the seasons. But what if this this star is actually part of a double system, and that within the cyclical trends there is a larger secular trend that waxes and wanes, the stagflation giant.


Well here is the news guys, US bonds yields have broken out of a decline that has lasted near twenty five years and at the same time the CDO model that has allowed aussie homeloans businesses like RAMS to print money are at the start of total dissarray. Interest rates have begun a rise that will end in fifteen years at rates in the high teens, or worse and the notion that you can loan money to anyone who can fog a mirror to buy property and then offload the risk to some dummies in a pension fund looking for yield will have long died. Ergo the RAMS model will in a short number of years be totally broke so is it not surprise that all the insiders are running to see the IPO boys. I wouldn't poke at it with a stick!


(Bloomberg) -- RAMS Mortgage Corp. plans to raise A$695 million ($590 million) in an initial public offering, after the Australian lender spurned a bid from Kohlberg Kravis Roberts & Co., two people with knowledge of the matter said.

Shares of Sydney-based RAMS will be sold at A$2.50 apiece, with founder John Kinghorn and another stakeholder to retain about 20 percent, according to the people who declined to be identified because details aren't public. The IPO will give the company a market value of A$885 million, they said.

Financial services companies in Australia are among those benefiting from buoyant demand for stock offerings. Sales of shares and equity-linked securities have almost doubled to $18 billion this year, compared with the first six months of 2006, according to data comp

The 24/7 Wall St. Twenty-Five Best Financial Blogs - MarketWatch

The 24/7 Wall St. Twenty-Five Best Financial Blogs - MarketWatch: "Here are the 24/7 Top Twenty-Five Financial Blogs. They do not appear in any order. We have added their Alexa rankings to give readers some idea of how much traffic each one gets.
Footnoted.org. Still the leader of web blogs that review SEC filings for hidden gems. Michelle Leder has uncovered a number of stories that were picked up in mainstream media. Doesn't get any better than this. Alexa rank: 477,383.
Stock Market Beat. Focuses on tech stocks and semiconductor and economic trends, but author William Trent does fine work on everything from bonds to transports. Alexa rank: 259,152.
The Kirk Report. From Charles E. Kirk, this blog covers daily market trends and is especially good at rounding up dozens of observations from other blogs and commentary sites. Gets special consideration for giving exposure to smaller blogs. Alexa rank: 129,617.
Bill Cara. Daily market commentary and frequent sector analysis. Cara has a view toward the long history of the markets which readers will find almost nowhere else. Alexa rank: 124,755.
The Peridot Capitalist. Written by Chad Brand, who runs an investment advisory service, this blog looks at companies and market news with a trader's eye. Often talks about his own long and short positions. Well-written and brutally honest. Alexa rank: 273,243.
Equity Investment Ideas. Author Yaser Anwar sometimes takes himself too seriously, but he publishes remarks on everything from individual companies to international monetary policy to technical analysis. Very well-researched. Alexa rank: 275,258.
SeekingAlpha. Grandfather of blog aggregation. David Jackson's creation also publishes comments from in-house staff. Only blog company that has brought in VC money, in this case from Benchmark. Well-funded, it operates in a category of its own. This blog is a full-fledged business. Alexa rank: 5,923.
TickerSense. Published by Birinyi Associates money management operation, this site does Weekly Blog Sentiment Poll and outstanding overviews of Wall St. trends, stocks, bonds, and ETFs. Alexa rank: 189,667.
Street Insider 13D Tracker. Timely pieces on major positions taken in public companies. Also tracks sometimes acrimonious fights between companies and holders. Alexa rank: 1,748,050.
Biohealth Investor. As good as any investment blog at covering biotech industry. Picks up blogs from several other sites, including 24/7. Unusually in-depth. Alexa rank: 235,249.
The AAO Weblog. Covers accounting industry, SEC activity, and government policy. Written by CPA Jack T. Ciesielski.
Internet Outsider. Henry Blodget's comments on internet and media stocks. Witty on top of the strong analysis. Alexa rank: 98,959.
Traderfeed. Too bad there are not more analysts where author Brett Steenbarger came from. The best on the psychology of trading and historical patterns in markets. Brilliantly thought out content. Alexa rank: 110,748.
Random Roger's Big Picture. The site covers a little bit too much of Roger's personal life, but it's worth going through that. Very good on foreign currency, overseas markets, and ETFs. Alexa rank: 231,124.
Bill Rempel NO DooDah's. Has a section on music he likes, but looking beyond that this blog is particularly good on market trends, some individual stocks, and predictive trading models. Alexa rank: 1,112,924.
10Q Detective. A look under the hood at SEC filings, particularly 10Q, 10Ks, and proxies. Well-written and extremely in-depth. Strong reporting on accounting aspects of filings. Written by David Phillips. Alexa rank: 1,204,728.
Ant & Sons. Weird name, strong financial site. Mostly individual stock investments with a lot on micro-caps. Frequently updated as business news hits that market. Alexa: 205,250.
Crossing Wall Street. One of the most broad-based financial blogs. Heavy on earnings, market and economic analysis, and index analysis. Alexa rank: 402,425.
The Kingsland Report. Solid analysis. Very broad spectrum. Hits individual stocks, government policy, mortgage industry, market comments. Alexa rank: 352,226.
Infectious Greed. Paul Kedrosky's blog. Funny stuff. Irreverent. Heavy orientation on current news. Focus on media, internet, the stock market. Alexa rank: 47,273.
Financial Skeptic. Droll and quick-witted. Look at individual companies, buy-out firm activity, and insider buying and selling at major companies. Alexa rank: 5,746,682.
Naked Shorts. Good coverage of hedge funds, scoundrels, Wall Street missteps. Alexa rank: 546,947.
Carl Futia. One of the best technical investing and financial forecasting blogs. Posts very regularly. Alexa rank: 514,391.
Investment Jungle. Looks at companies through lenses of return on invested capital, return on investment, EPS, P/E, and other metrics. Strong analysis. Very disciplined. Alexa rank: 188,828.
Stocks and Blogs. Especially good at looking at which stocks to buy and sell, and when. A fair amount of focus on foreign company stocks, which tend to be a rarely covered subject in most financial blogs. Alexa ranking; 1,617,871.
Douglas A. McIntyre can be reached at douglasamcintyre@247wallst.com. He does not own securities in companies that he writes about.

Looking for Contagion in All the Wrong Places

PIMCO Bonds - Investment Outlook-July 2007 "Looking for Contagion in All the Wrong Places": "Whew, that was a close one! Ugly for a few days I guess, but it could have been much worse! No, I refer not to Paris Hilton upon her initial release from the LA County pokey after serving three days of hard time, but to the Bear Stearns/subprime crisis. Shame on you Mr. Stearns, or whoever you were, for scaring us investors like that and moving the Blackstone IPO to the second page of the WSJ. We should have had a week of revelry and celebration of levered risk taking. Instead you forced us to remember Long Term Capital Management and acknowledge once again (although infrequently) that genius, when combined with borrowed money, can fail. But (as the Street would have you believe), this was just a close one. Sure Bear itself had to come up with a $3 billion bailout, but folks, most of these assets are worth 100 cents on the dollar. At least that’s how they have ‘em marked! Didn’t wanna sell any so that someone would think otherwise…no need to yell “fire” in a crowded theater ‘ya know. After all, hasn’t Ben Bernanke repeated in endless drones that financial derivatives are a healthy influence on the financial markets and the economy? And aren’t these assets well…financial derivatives? Besides, I"

CDO's in hooker heels fooled Moody, S&P

Moody's Investors Service and Standard & Poor's were duped by the make-up and ``six-inch hooker heels'' of collateralized debt obligations they gave investment-grade ratings, and investors now stand to lose all their money, according to Bill Gross, manager of the world's biggest bond fund.

Subprime mortgage bonds made up about $100 billion of the $375 billion of CDOs sold in the U.S. in 2006, Moody's and Morgan Stanley data show. CDO's are created by bankers and money managers who bundle together securities and divide them into slices with credit ratings as high as AAA.

With defaults on those subprime loans rising, buyers of the BBB pieces of some CDOs stand to lose their entire investment, said Gross, chief investment officer at Pacific Investment Management Co. Gross manages the $103 billion flagship PIMCO Total Return Fund in Newport Beach, California.

``AAA? You were wooed Mr. Moody's and Mr. Poor's by the makeup, those six-inch hooker heels and a `tramp stamp,''' Gross said in his monthly commentary posted on Pimco's Web site today. ``Many of these good looking girls are not high-class assets worth 100 cents on the dollar.''

Subprime mortgages are loans made to borrowers with poor or limited credit histories, or high debt burdens. Mortgages at banks with past due payments are the highest since 1994, according to first-quarter data compiled by the Federal Deposit Insurance Corp., the agency that insures deposits at 8,650 U.S. financial institutions.

`Like a Weed'

Defaults on subprime loans will ``grow and grow like a weed in your backyard tomato patch'' and if total losses reach 10 percent, CDO slices rated A may also ``face the grim reaper,'' Gross said.

Christopher Atkins, spokesman for S&P in New York, declined to comment. Frances Laserson, spokeswoman for Moody's in New York, declined to immediately comment.

The credit rating companies ``were downgrading hundreds of these CDO structures in the last few weeks and that is an early indication of being fooled,'' Gross said in an interview today. ``We can see certain structures rated investment-grade losing much or most of their money over the next six or 12 months.''

At least 60 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data. Irvine, California-based New Century Financial Corp. and ResMae Mortgage Corp. of Brea, California, were forced into bankruptcy. UBS AG, Switzerland's biggest bank, shut down its Dillon Read Capital Management LLC hedge fund unit after losses linked to turmoil in the mortgage-bond market.

Bear Bailout

New York-based Bear Stearns Cos. is working to bail out two money-losing hedge funds it runs that invested in CDOs backed by subprime mortgage bonds.

Pimco bid on securities auctioned off by the failing Bear Stearns funds and its creditors because not all of them are of poor quality, Gross said in the interview. Pimco had $10 billion in CDO assets, based on face value, as of March 31, 2006, according to an S&P report from last June.

``Those that point to a crisis averted and a return to normalcy are really looking for contagion in all the wrong places,'' Gross said. ``Because the problem lies not in a Bear Stearns hedge fund that can be papered over with 100 cents on the dollar marks. The flaw resides in the Summerlin suburbs of Las Vegas, Nevada, in the extended city limits of Chicago headed west towards Rockford and yes, the naked -- and empty -- rows of multistoried condos in Miami.''

Fed Cut?

Gross maintains his prediction the Federal Reserve will cut its target interest rate in the next six months as a slowdown in the housing market causes risk premiums to rise and the U.S. economy to slow. Gross said in October that slowing U.S. growth would prompt the Fed to lower rates in the first half of this year. The Fed has kept the benchmark rate at 5.25 percent for the past year.

The Pimco Total Return Fund returned 0.5 percent through May of this year, underperforming its benchmark, the Lehman Brothers Aggregate Bond Index, by 0.8 percentage points, according to Morningstar Inc. data.

Sales of previously owned homes in the U.S. fell in May to the lowest in almost four years, the National Association of Realtors said yesterday. The median sale price of an existing home fell 2.1 percent to $223,700 in May from a year earlier, the 10th straight month of year-over-year declines, the group said.

``The willingness to extend credit in other areas -- high yield, bank loans and even certain segments of the AAA asset- backed commercial paper market -- should feel the cooling Arctic winds of a liquidity constriction,'' Gross said.

Bits of News - Subprime Housing Debacle Threatens To Cause Global Depression

Bits of News - Subprime Housing Debacle Threatens To Cause Global Depression: "Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived', said the bank.

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.


In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be 'cleaned up' afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.

It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment built up in the boom years had suffocating effects.

The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances, citing a current account deficit running at 6.5pc of GDP, a "

Bear Stearns Rivals Reject Fund Bailout in LTCM Redux

Bloomberg.com: Exclusive: "une 25 (Bloomberg) -- Bear Stearns Cos. is getting a taste of its own medicine.

It was Bear Stearns, the biggest broker to hedge funds, that nine years ago declined to join 14 other investment banks in the bailout of Long-Term Capital Management LP. Then last week, as New York-based Bear Stearns pleaded for help to rescue two of its hedge funds teetering on the brink of collapse, many of the same firms refused to come to its aid.

Merrill Lynch & Co., which pumped $300 million into LTCM, said no and seized $850 million of bonds held as collateral for loans it had made to the funds. Lehman Brothers Holdings Inc., JPMorgan Chase & Co. and Cantor Fitzgerald LP also pulled out, leaving Bear Stearns to sort through the wreckage of bad bets on subprime mortgage bonds and collateralized debt obligations.

``There is a good analogy to Long-Term Capital,'' said Anthony Sanders, a former director of mortgage-bond research at Deutsche Bank AG who starts next month as a professor of finance and real estate at Arizona State University's W.P. Carey School of Business in Tempe, Arizona. ``They were all friends with Bear Stearns when they thought the spreads were huge. Now that the market has turned, Bear's standing there like the lone grizzly.''"

BIS warns of Great Depression dangers from credit spree

By Ambrose Evans-Pritchard
Last Updated: 9:02am BST 25/06/2007



The Bank for International Settlements, the world's most prestigious financial body, has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.

"Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived", said the bank.

The BIS, the ultimate bank of central bankers, pointed to a confluence a worrying signs, citing mass issuance of new-fangled credit instruments, soaring levels of household debt, extreme appetite for risk shown by investors, and entrenched imbalances in the world currency system.

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"Behind each set of concerns lurks the common factor of highly accommodating financial conditions. Tail events affecting the global economy might at some point have much higher costs than is commonly supposed," it said.

The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity.

"The Chinese economy seems to be demonstrating very similar, disquieting symptoms," it said, citing ballooning credit, an asset boom, and "massive investments" in heavy industry.

Some 40pc of China's state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.

It said China's growth was "unstable, unbalance, uncoordinated and unsustainable", borrowing a line from Chinese premier Wen Jiabao

In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be "cleaned up" afterwards - which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust.

It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment build up in the boom years had suffocating effects.

While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and "sowing the seeds for more serious problems further ahead."

The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances, citing a current account deficit running at 6.5pc of GDP, a rise in US external liabilities by over $4 trillion from 2001 to 2005, and an unprecedented drop in the savings rate. "The dollar clearly remains vulnerable to a sudden loss of private sector confidence," it said.

The BIS said last year's record issuance of $470bn in collateralized debt obligations (CDO), and a further $524bn in "synthetic" CDOs had effectively opened the lending taps even further. "Mortgage credit has become more available and on easier terms to borrowers almost everywhere. Only in recent months has the downside become more apparent," it said.

CDO's are bond-like packages of mortgages and other forms of debt. The BIS said banks transfer the exposure to buyers of the securities, giving them little incentive to assess risk or carry out due diligence.

Mergers and takeovers reached $4.1 trillion worldwide last year.

Leveraged buy-outs touched $753bn, with an average debt/cash flow ratio hitting a record 5.4.

"Sooner or later the credit cycle will turn and default rates will begin to rise," said the bank.

"The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability. The strategy depends on the availability of cheap funding," it said.

That may not last much longer. It's a worry.

naked capitalism

naked capitalism: "We had wanted to write about the role of models and more important, model assumptions in the ongoing Bear Stearns hedge fund debacle, and Gretchen Morgenson of the New York Times, in her story, 'When Models Misbehave,' provided some useful intelligence.

With all due respect to Morgenson, while she touches on some dimensions of the problem, she doesn't begin to capture how woefully inadequate the risk management and risk modeling processes are that are apparently standard practice on Wall Street for collateralized debt obligations, which has been a rapidly growing market in recent years. And the worst is these shortcomings have been in plain view."

Let's start with Morgenson:

First, marking illiquid securities to a model that makes certain assumptions about their future behavior is not the same thing as marking to an honest-to-goodness market of buyers and sellers...

In worst-case scenarios, such models may reflect the fantasy that a firm’s principals prefer, not the reality of a security’s likely value. And yet, investors and financial firms everywhere are relying heavily on these models and building their balance sheets accordingly — a very dangerous game, especially when it comes to complex pools of securities backed by assets like home loans.

What does this mean in cold, hard cash? On a conference call with clients on Thursday, a Credit Suisse analyst estimated that the markdowns would likely be in the billions of dollars.

That brings us to our second lesson, which is another blinding glimpse of the obvious emerging from this debacle: the rating agencies, which investors rely on to be prescient cops on the beat, are stunningly behind on downgrading mortgage-backed securities and the pools that own them. Do the math: Bear Stearns is paying $3.2 billion to shore up a fund that once had $10 billion in value, according to one investor. That’s 32 cents on the dollar.

THE portfolio wasn’t just made up of toxic stuff, either. While 60 percent of the fund was invested in residential mortgages, 40 percent was in commercial loans. Moreover, 90 percent of the fund consisted of securities with AA or AAA ratings, according to the investor.

Officials at ratings agencies have said in the past that their ratings reflect their estimates of future performance, not market pricing. So the agencies are also marking to model. And that keeps people playing the fantasy game about values, especially in hard-to-analyze collateralized debt obligations that are essentially pools of other asset-backed securities. Some $1 trillion of C.D.O.’s have been issued. (Yep, C.D.O.’s were in the troubled Bear funds.)

“The C.D.O. sector is still extremely rich versus where the underlying collateral is trading,” said Albert Sohn of Credit Suisse on the conference call. “Either subprime has to get richer or C.D.O.’s have to get cheaper.”


I hate to sound like I am picking on Morgenson, who is a fine journalist, but market arcana is not her beat. There is enough wrong with this piece so as to make it somewhat misleading, and almost all of it is in the direction of making the situation sound better than it is.

Morgenson is right that marking to model is problematic, but she only skims the surface of how detached from reality the CDO assumptions, developed by the ratings agencies, are. This post from Minyanville give a much clearer picture:

I asked a large broker firm to send over its smartest math person on Collateralized Debt Obligations (CDO) structuring. I wanted to know what I am missing: why is the market so sanguine in the face of deteriorating collateral values in the mortgage market? One of my firm's theses has been that, as the mortgage market deteriorates, investors holding CDO as an investment would realize losses and this would feed into other risky asset classes. Why aren’t losses being seen when the market is clearly deteriorating?

The team that came over was headed by a very smart gentleman. He was very good at math and very straightforward. Working for a broker I was prepared for some sugar coating. I didn’t get any.

The answer is simple and scary: conflict of interest.

He explained that due to the many layers of today's complicated credit products, the assumptions used to dictate the pricing and outcome of CDO are extremely subjective. The process is so subjective in fact that in order to make the market work an “impartial” pricing mechanism must exist that the entire market relies upon. Enter the credit agencies. They use their models, which are not sensitive to current or expected economic activity, but are based almost entirely on past and current default rates and cash flow to price the risk. This of course raises two issues.

The subprime meltdown, continued | Bearish turns | Economist.com

The subprime meltdown, continued | Bearish turns | Economist.com: "“THEY kept pointing to the juicy yield, but our guys soon saw the paper for what it was: nuclear.” Thus one chief executive, recounting his investment firm's decision to spurn an offer of securities backed by subprime (low-quality) mortgages from Bear Stearns, a large investment bank. The radiation appears to have seeped out at its source, leaving two of Bear's own hedge funds terminally sick. Coming less than two months after UBS, a Swiss bank, closed a fund that had lost over $120m as the subprime market crumbled, the incident is a clear sign that concern is shifting from small, specialist lenders—dozens of which have gone bust—to the supposedly more sophisticated Wall Street firms that package, distribute and trade bonds tied to home loans.

Of the big securities houses, Bear is the most exposed to subprime. So no one was shocked when it announced a 10% fall in underlying profits for the latest quarter. But the fate of its year-old, unfortunately named High-Grade Structured Credit Strategies Enhanced Leverage Fund and its sister fund, the High-Grade Structured Credit Strategies Fund, has raised eyebrows. Run by Ralph Cioffi, an industry veteran, they were thought to be among the shrewdest actors in the mortgage-debt markets. Their downfall suggests that hedging at the highest levels is not as adept as it might be.

The enhanced-leverage fund lost 23% of its value in the first four months of the year as the subprime market collapsed, then stabilised, then fell again. The fund's problems were compounded by its borrowings, which were ten times bigger than its $600m in capital. This made it more vulnerable when things went wrong.

Last week Bear's funds, besieged by disgruntled investors, offloaded securities with a face value of at least $4 billion to free up capital. This fire sale was not enough for one creditor, Merrill Lynch, which seized collateral and threatened to auction it off to cover its losses.

Bear persuaded Merrill to stay its hand by agreeing to negotiate a rescue with a consortium of banks. At one point an injection of $500m in new capital looked possible, with Bear itself offering to lend an additional $1.5 billion. But the plan fell apart. On June 20th Merrill began hawking some of the funds' assets to other hedge funds, while other creditors, such as JP Morgan Chase and Deutsche Bank, worked with Bear to unwind their positions. But there were few buyers for the bank's subprime-backed debt, even the highest-rated paper.

The six hurdles to successful trading are:

1. Trading for the thrill of it.
2. Trading for revenge.
3. Lack of money management.
4. No well-defined trading plan.
5. Inability to pull the trigger.
6. Inability to admit you’re wrong.

Here’s how to overcome the hurdles, from Trading Commodities and Financial Futures:

Condition Yourself to be Unemotional

If you are trading for the thrill of it, you’ll trade when the conditions favor your methods and you’ll trade when they don’t. Because you are trading emotionally, you will overtrade---the inevitable outcome of thrill trading. You will also overstay your welcome on trades not going your way and this invites disaster. It might work for a time, but there will come a time when it will wipe you out.

Revenge Trading; Another Recipe for Disaster

Has this ever happened to you? You have just been stopped out for a loss, a bigger loss than you had anticipated. Perhaps, it was a ‘gap open’ beyond your stop due to some unexpected news. It is early in the trading day, and you feel you must make it back. The market owes you your money back and it must do so today! Have you ever had this feeling?

Well, I have, and let me tell you when I’m out for revenge, 9 times out of 10 it ends badly. This is because the state of mind is unstable leading to bad decisions. When you get this feeling, force yourself to take a step back and relax. The market will be there for you tomorrow and there are always opportunities.

Preservation of Capital is Your Primary Mission

When you have no money management program, it’s impossible to preserve your stake. Unless you tell yourself you will only risk X percent of your account on any one trade, that one trade that looks so right will inevitably come along and you will overtrade it. Let me share a secret with you; they all look so right. I would not enter a trade unless it looked real good, but it seems there is no way to know in advance which trade is going to be the big winner.

If we knew this then these would be the only ones we would trade. For me, I’ve found it’s a small number of trades that makes my year each year, and many times not the trades I thought would be the big winners. You must preserve your capital, and this means taking small hits on the many and inevitable losers. The goal is to still be in the game when those ‘mega-trades’ finally materialize.

Your Plan Must be Well-Defined

Nobody enters a position expecting it will result in a loss, however it will not come as news that even top traders experience numerous losses. So if the best will lose, why would you be any different? A well-defined plan will define success and failure both.

Ask yourself why are you buying gold? If the answer is something like, ‘because it just broke above the 30 day moving average’, or ‘because the CPI indicates inflation is heating up and in the long run gold is sensitive to inflation’, you have not defined your plan. You have reasons why you entered, but no clear exit strategy.

You are trading on hope and this is not a recipe for success. You must define your loss point before you enter the trade, and if you are not mentally prepared to lose, you’ll never win. It is essential to realize you’ll lose countless battles in this trading war, or the war will never be won. You should have a profit objective. Stop loss points should be written in stone, however profit points can be flexible and you should have contingency plans when your profit objective is reached.

The plan could be nothing more than something like this; ‘I am risking $500 per contract on this trade and my technical profit objective is $1200. If the market moves $500 my way, I move my stop up to an approximate break even and if it moves $900 my way, I move the stop up to approximate a $400 profit. If it reaches my technical objective I watch very closely for signs of failure; if the market shows these signs, I sell at the market, however if it moves through, I tighten my stop to just under the previous low’. This plan may or may not work, but at least it is a plan, and without a plan you’re ultimately doomed to failure.

You Must Act Without Hesitation (if there's good reason to do so)

When you ‘paper trade’ you always take the loss or the profit. In the heat of the battle it is not as easy to pull the trigger.

Remember, you must lose to win in this game. Too many times, even good traders will not take the loss when the planned risk point is reached. It is a human trait not to be able to admit you are wrong, and it is seductive to wait just a bit longer or take just a bit more risk in the hope the market will turn back your way.

In the great majority of cases, this just exacerbates the pain. How do you overcome this shortcoming? Very simple. Place a physical stop loss order with your broker the moment you enter the trade and then just let the “Market Gods” determine your fate. Trust me when I tell you this; you won’t be stopped out of the very best trades.

Condition Yourself to be Humble

You cannot have an ego and be a successful trader. With apologies to Vince Lombardi, winning is not everything, and it is not the only thing. I had a client with an S&P day trading system that made money four out of five trades. The problem was that fifth losing trade more than offset the other four winners. Yet, until he ran out of money, he kept trading it for small profits because it felt good to him.

I have seen numerous clients try to pick tops and bottoms, yet this is an almost impossible task because every major move has just one top and just one bottom. Who cares if any one trade makes money or if you have more losers than winners? The name of this game is not how many winners you have, but making money at the end. Forget about being right on any particular trade and focus on making money!

Gerard Minack Sydney

Markets continue to be unsettled by the fall-out from sub-prime mortgage market in the US. Wall Street fell on Friday, and there do now appear to be some safe-haven flows, as evidenced by sharp fall in short-end Treasury yields (Exhibit 1). The focus is now on losses at two hedge funds run by Bear Stearns. Here are some comments:

First, some commentaries have compared the Bear Stearns' funds with Long Term Capital Management (LTCM). From my understanding – and here all I have to go on is the wire reports – the two episodes are in a different league. Reports on Bloomberg suggest that the Bear Stearns funds, which specialise in mortgage bonds, have lost as much as 20% of their value. The same reports suggest that the funds had invested US$11 billion, of which $9 billion was borrowed.

Compare those figures to LTCM. Before LTCM ran aground it had equity of around $4¾ billion, which supported borrowing of around $125 billion. In addition, it had off-balance sheet derivative positions of $1¼ trillion. This was an order of magnitude (or two) larger than the capital at risk now.

Second, while LTCM's threatened collapse clearly posed systemic risks, there are no sign of that now. That's in part because the gross exposure seems far smaller. While it's not at all clear what the ultimate losses may be in the specific funds, it seems likely to be smaller than the ultimate losses at LTCM (around $4.6 billion), and smaller than those recorded by, say, Amaranth when it failed last year.

Moving away from the specifics of the Bear Stearns funds, there are a few other points to note about what's happened.

First, it seems that things will get worse before they get better with sub-prime mortgages. As Exhibit 2 shows, a large numbers of ARM resets fall due this year. In addition, house price indicators continue to deteriorate, reducing the prospect of a borrower in trouble being able to sell the home and repay the loan. Refinancing is more difficult now that lending standards have been tightened.

How much of this is in the price of mortgage-related securities is a moot point. Prices on at-risk mortgage products have already reacted (Exhibit 3 – although note that this is weekly data; the sub-prime index apparently finished Friday at new price lows).

Second, part of the concerns with the Bear Stearns' funds relates to the pricing of the more exotic instruments in their portfolio. Because liquidity is low, it's not clear what is a fair market price – or what prices other funds are carrying similar instruments on their books. One concerns is therefore that the forced sale of some of those instruments may establish a low market price, forcing other funds to mark down their asset values. No one, it seems, wants to admit what's becoming increasingly obvious: these have been poor investments.

This highlights two of the problems with the ‘new technology' of debt: first, that in the absence of a transparent market, pricing is difficult (and hence, as Warren Buffet noted, parties on opposing sides of a deal can both assume that they are ‘winners'). Second, liquidity is often an issue.

There is another potential problem with the new world of securitised debt: coordinating creditors becomes an issue. The New York Fed famously brokered a deal with LTCM's principal creditors, and 16 participants injected $3.6 billion to prevent the fund collapsing. Arranging a similar deal now, if ever it were required, in a world of sliced, diced and securitised debt would be far more difficult.

Finally – and importantly – it still seems that investors are ring-fencing the problems in the mortgage market, with broader credit markets remaining well-behaved. Exhibit 4 shows spreads on generic credit default swap spreads.

My view is that the problems in sub-prime are indicative of a bubble that extends through credit markets. Ultimately, many of the problems now appearing in sub-prime – excess borrowing, with low lending standards on tight spreads, the lack of transparency and liquidity in secondary markets – will likewise affect corporate credit. But it remains unclear when.

The closest analogy I can see to the behaviour of credit markets now is in the latter stages of the TMT boom. Although often forgotten, internet stocks caved in through the first half of 1999 (Bloomberg's internet index halved in value). That setback was likewise ring-fenced from the broader bubble, and TMT overall continued to do well. (Full disclosure: the internet index then tripled between August 1999 and March 2000.)

So it may be that the overall credit bubble may persist even as one of its offshoots pops. However, this now needs to be watched closely: to state the obvious, if the problems in sub-prime do start to infect the overall credit universe, it would be very important for investors in debt and equity.

Gerard Minack

Morgan Stanley

Black(stone) Friday! Oh Oh, Credit Markets Come Home To Roost!

Market Ticker: "Let's dispense with the silly first - BX (Blackstone) looks to be opening up in the $37 range. That's not awful, but its hardly the huge pop that people were talking about with the oversubscription ratio.

The Dow, S&P and Nasdaq all opened up moderately down. The 10 is up again, opening up 0.7%, which puts us back in the groove on interest rates - going higher. The markets are doing the 'inverse of the 10' deal again this morning; the charts on my 9-pane are interesting; near perfect inverses for the first few minutes, but then they appear to have decoupled a bit. It will be interesting to see how this plays out over the remainder of the day - my guess is that the 'Blackstone fever' has infested traders - at least for a while. Certainly, its all CNBS was talking about for the first half-hour!

As I noted last night, we got the Hindenburg Omen confirmation. Asian markets were down last night; I wonder how much of that was people paying attention and how much was just plain old-fashioned exhaustion."

Black(stone) Friday! Oh Oh, Credit Markets Come Home To Roost!

Let's dispense with the silly first - BX (Blackstone) looks to be opening up in the $37 range. That's not awful, but its hardly the huge pop that people were talking about with the oversubscription ratio.

The Dow, S&P and Nasdaq all opened up moderately down. The 10 is up again, opening up 0.7%, which puts us back in the groove on interest rates - going higher. The markets are doing the "inverse of the 10" deal again this morning; the charts on my 9-pane are interesting; near perfect inverses for the first few minutes, but then they appear to have decoupled a bit. It will be interesting to see how this plays out over the remainder of the day - my guess is that the "Blackstone fever" has infested traders - at least for a while. Certainly, its all CNBS was talking about for the first half-hour!

As I noted last night, we got the Hindenburg Omen confirmation. Asian markets were down last night; I wonder how much of that was people paying attention and how much was just plain old-fashioned exhaustion.

It looks like the market is starting to consider risk once again:

"June 22 (Bloomberg) -- U.S. stocks fell on concern hedge- fund losses at Bear Stearns Cos. may signal wider problems in credit markets.

Bear Stearns, the second-biggest U.S. underwriter of mortgage bonds, dropped after people with knowledge of the company's proposal said it plans to take on $3.2 billion of loans to stave off the collapse of a hedge fund. Citigroup Inc., JPMorgan Chase & Co. and Moody's Corp. also declined. "

No, you think?

$3.2 billion? For guys that had $6b in leverage out against $600m in collateral?

So what's the truth here guys? The claim was that they lost "20%"? Really? Or was it 50%? Or was the leverage ratio more like 25:1, not 10:1?

And better - why do you flush $3.2 billion down the toilet if you're Bear Stearns? There is only one reason to do that - you're afraid of the explosion that will result if you don't do it - that is, the blast will be even bigger in its impact on your bottom line.

CNBC is also reporting that Cantor Fitzgerald is getting bids as low as ten cents on the dollar for some of the CDOs they're trying to sell! That's a ninety percent haircut!

There are a lot of liars out here on the street right now, and sooner or later, they're going to have to fess up. If the real loss was 50%, that's horrendous. It also tells you a lot about the exposure on the street to this issue and points out the fact that there is absolutely no way that this will be, or can be, contained. It simply doesn't matter whether people want it to be or not - there is some $2-3 trillion in losses out there that are being hidden under the carpet at the present time!

This can and WILL come out, and if I'm right about the magnitude of this "crash" isn't the right word for what's coming. More like catastrophe. This pile of paper is what supports the consumer credit markets! If it implodes, and it looks like that's exactly what's happening, the damage, given the leverage being employed, will be tremendous.

We haven't seen a day with the futures limit down in the AM in five or six years. We may well be headed for a few of them in the coming months.

Let me be clear - what I'm implying here is that this cycle of fraud and avarice in the markets may be worse than the '00 Tech Wreck. In fact, it may be much worse.

You heard it here first guys and gals. I may be wrong about this - but the evidence appears to be mounting that indeed, I'm right - and the pump monkeys out there are doing their damndest to keep you, the retail bagholder, from finding out, because they know what happens once the cat is out of the bag.

Unfortunately, Bear's Hedge Fund blowup has let the cinch loosen up a bit on the sack that has been kept tightly closed since February, and it appears that at least one rabid cat got loose.

Now they've got a problem - as I noted last night there's at least one small broker/dealer that has been shut down due to repricing of assets. This is likely to continue, but the "big guys" on Wall Street are almost certain to lie about their exposure until they are forced - by someone -to fess up.

And lookie what that rabid cat dragged back home and dropped in front of the door!

"June 22 (Bloomberg) -- Losses in the U.S. mortgage market may be the ``tip of the iceberg'' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said. "

Oops. And who do they target? One of my favorite whipping boys - Countrywide Financial and another good one for the post, Indymac Bank. Are 'ya short (or, if you prefer, "Got PUTs"), perhaps?

Then there's this from Bloomberg:

"June 22 (Bloomberg) -- U.S. high-yield debt investors, after snapping up a record $600 billion in new loans and bonds this year, are starting to push back."

No, you think?

And finally we see a ratings agency waking up.

"NEW YORK, June 22 (Reuters) - Fitch Ratings on Friday said it may cut its collateralized debt obligation (CDO) manager rating on Bear Stearns Asset Management, part of Bear Stearns Cos.' due to troubles arising from bad bets on subprime mortgages."

Hmmmm.... do you think that perhaps - just perhaps - the credit markets might be freaking out a bit? Uh huh....... The ratings agencies - late to the party, but they can't ignore it forever - unless they want to get sued out past Pluto. Not for being wrong - for willful or even collusive overrating of debt instruments in the face of hard evidence that the ratings are vastly too high.

And let's be perfectly clear on this - this is not confined to subprime mortgages or even residential housing. Today was horrible in the CMBX as well - not only is the BB up (again) and now in the stratosphere zone, nearly straight up since the 6th of June (a total of over 60 bps!) but the BBBs, As and even the "gold standard" AAA spreads are moving the wrong way. Someone (or perhaps, given the BROAD impact now, lots of someones) is/are in trouble in the commercial R/E space, but I still don't know who.

Contained? I don't think so!

Now add this - I have reason to believe (from perusing the public statements out of the OCC) that before the year is out stated income loans will be toast. This is going to be lots of fun for the homebuilders and the housing industry in general. It needs to happen, but it is not going to be pretty. If you want to know why I am quite sure this is going to happen, read this document. The salient part of it is:

"Let’s not sugar-coat what’s going on here. The practice of inflating income is at best misleading, and at worst, fraudulent. Yet if the studies are to be believed, it’s a practice that has become widespread in the riskier loans in the mortgage market."

Any questions?

The speaker? John Dugan, Comptroller of the Currency on May 23rd of this year. You know, the guy who can make that happen? Yep.

To add to this, we got another Hindenburg Omen today and the S&P closed under the 50 (not by a lot, but under is under!) There goes your first-level support. 1490 is now the critical number; if we close under that decisively, odds are very high that a major top is in and the trend to the upside has been broken, although I want to see the Dow Jones and Nasdaq also break the 50 - which they have approached but not yet done.

In addition, if there was a McClellan on the Nasdaq, we'd have a Hindenburg there too. Some people have said that the NYSE isn't "really" the right thing to use for this because of all the "bonds that trade like stocks." Well, that doesn't apply to the Nasdaq, and it too had New Highs and New Lows both over 2.2%.

Finally, Goldman broke the 50 decisively to the downside.

If you remember my list from here, we now have:

* The S&P closes under the 1490 level. NOT YET.
* China blows up (stocks). NOT YET.
* Goldman, Bear and Merrill close under their 50s. NEW SIGNAL TODAY; Goldman. All three now below. CHECK.
* HGX breaks trendline support. CHECK (from the other day).
* The Nasdaq (and Dow) break their 50s. NOT YET.

So we've got two of five, with two of the remaining three one more solid selloff away. The Nasdaq will breach the 50 at 2564, while the DOW does at 13,321 (about 40 points more down.) Monday, depending on China's action Sunday night, could reach all three targets, making five of five.
So what do we have to look forward to here?

This is my thesis, which you might note hasn't changed much over the last three months......

We have ~$300 trillion in notional value of derivatives flying around. If even 1% of those go boom, that's a $3 trillion dollar explosion - to put this in perspective, the US GDP last year was $13 trillion dollars, give or take one. That is an absolutely huge amount of money and no amount of "pumping" by the Fed or anyone else will stave off what is going to happen when it detonates and the Fed knows it.

Worse, foreigners have gotten a whiff of the stink and they're bailing on both the dollar and treasuries. This is ominous because as treasuries mature they are effectively "bought back" and a new sucker, er, investor is required to take their place. If this fails to continue at any point real interest rates will rise precipitously - they could shoot as high as 10% in a month's time, as the government will be forced to raise the offered coupon in order to finance its debt! There is really no other option, and the fear of this event - if that dynamic gets going and cascades there is no way to stop it as it is totally beyond US borders - will keep the Fed from attempting to keep the party going for much longer. As evidence of this, the TOMO activity (liquidity flush) from the Fed this week has been enormous, yet it has had almost no net positive effect. The taps are now being slowly closed, as despite the rise in bond prices the Dollar has resumed its slide, especially against the Euro and Pound. This is very likely to continue.

Next, Japan's government is getting very concerned about the effects of a forced "fast unwind" of the carry trade on their economy. They're wising up, and as a consequence they're starting to jawbone about doing something to slow it down. The market is responding by unwinding some of these trades to avoid being caught "offsides" if Japan decides to get truly aggressive. FX moves that go against you will BURY you in short order - the FX markets are amazingly liquid but margin capabilities are crazy in those markets. What this means, however, is that adverse moves have a habit of wiping people out even when the move as a percentage is quite small. This is certain to continue.

The government (ours) is very unhappy about the idea of people risking someone else's money yet treating the gain as a capital gain when they're right - and someone else's loss when they're wrong. This inequity is almost certain to be corrected, if not now (assuming Bush vetos it) down the road after the '08 elections. This change, by the way, needs to happen - carried interest is really more like a bonus than a capital gain, and while I know the hedgies and such will scream, they better get used to the idea because down the road I think it is a near certainty that the treatment will be revised. This will put a damper on private equity and LBO activity.

Real inflation is running close to 10% annually in the US. Eventually, the politicians and bankers will be forced to deal with this by raising the Fed Funds rate to defend the dollar, because most of this inflation is occurring via FX disadvantages in imports. Why forced? Because if they don't more and more nations will break their dollar pegs, a trend that is already starting in the Middle East - not a good place for it, given that we buy OIL from there. This is certain to play out over the next couple of years and will further drain the liquidity pool.

The OCC (regulators of banks) has said (if you read the right sorts of places) that stated income loans are likely to be restricted severely or banned outright this year. Guess what that will do to what's left of the bubble? Yep. Bye-bye. Return to rational valuations or you cannot sell the house. Period! By the way, this is probably the fairest way to solve that particular problem - and its a problem that needs to be solved. This process is very likely to move forward, with a formal comment period after the proposal is put out sometime this summer.

Companies that levered themselves up by buying back stock with debt and other cute financial tricks will find the cost of financing that debt has grown precipitously. When you have a D/E ratio on your balance sheet of 8:1, even small changes have ruinous impacts on your profits. This is nearly certain to hose entire sectors, especially mortgage lenders and home builders, who are in the worst possible position to be able to afford it. This trend is very likely to continue.

That's it for now - may update it later this evening or over the weekend.

Systemic fallout dead ahead?

The Tip of the Iceberg?: "The near-collapse of two big Bear Stearns hedge funds heavily invested in highly-speculative packages of subprime mortgages indicates that the severe housing recession is spreading to the financial arena and is threatening the occurrence of systemic fallout. It is estimated that various institutions own about $6 trillion of mortgage-backed securities of which about $800 billion are subprime. About 13% of subprime mortgages are currently in default, and foreclosure rates on these loans are soaring.



In addition about $2 trillion of mortgage securities are backed by adjustable rate loans (ARMS) that have been or will soon be reset at higher rates. An estimated 29% of all mortgages issued in the last three years were ARMS. Home buyers who took out ARMS in 2004 have already seen their rates rise by about 40%, adding about $290 a month in additional payments on a $300,000 mortgage. Many of these buyers will not be able to refinance at fixed rates as a result of higher mortgage rates and stricter regulations that will disqualify would-be borrowers."

Losses - tip of the iceberg

Bloomberg.com: News: "une 22 (Bloomberg) -- Losses in the U.S. mortgage market may be the ``tip of the iceberg'' as borrowers fail to keep up with rising payments on billions worth of adjustable-rate loans in coming months, Bank of America Corp. analysts said.

Homeowners with about $515 billion on adjustable-rate home loans will pay more this year, and another $680 billion worth of mortgages will reset next year, analysts led by Robert Lacoursiere wrote in a research note today. More than 70 percent of the total was granted to subprime borrowers, people with the riskiest credit records, they said.

Surging defaults on subprime loans have pushed at least 60 mortgage companies to close or sell operations and forced Bear Stearns Cos. to offer a $3.2 billion bailout for one of two money-losing hedge funds. New foreclosures set a record in the first quarter, with subprime borrowers leading the way, the Mortgage Bankers Association reported."

Bear Stearns and MBS Hedge Funds: What are the real risks today?

Safe Haven | Bear Stearns and MBS Hedge Funds: What are the real risks today?: "'...What people don't fully appreciate is the extent to which our financial system has geared up over the last twenty years to finance the worldwide residential housing boom...'

MOST SIGNIFICANT MARKET EVENTS cause an immediate and substantial price reaction, which makes it hard to profit from them. But sometimes there's a sort of slumber, when the market gazes sleepily about itself not quite sure what to do.

We may be experiencing one of them now.

This week a major American investment bank called Bear Stearns was reported as having some serious trouble with a couple of hedge funds. It is difficult to be clear exactly what is going on, because this story involves lots of people and banks who have a vested interest in not being very open. I have been trying to find out the details."

Cantarell 'to decline by 14% per year'

Upstreamonline - Cantarell 'to decline by 14% per year': "Pemex chief executive Luis Ramirez Corzo said he expects production from the state-owned oil company's giant Cantarell field to decline by about 14% per year between 2007 and 2015.

Ramirez told Mexico's Senate Energy Committee that the annual decline of the field was equivalent to about 150,000 barrels per day, the Associated Press reported.

The field began declining in 2005 from record production of 2.13 million barrels per day in 2004.

Corzo said Cantarell was expected to produce an average of 1.8 million barrels per day this year.

He added Pemex was struggling to pay for deep-water exploration to replace the Cantarell output. Corzo added the company needed to invest at least $18 billion a year in exploration and production to maintain output of about 3.3 million barrels a day."

Australia, the US and torture

I thought if history taught us anything, it taught us that torture was useless in learning the truth; people tell you want you want to hear and it becomes an end it itself. Western civilisation without a commitment to the rule of law and its secular moral high ground has little to offer.

The Guardian 20 June, 2007

Bob Briton

On Monday evening last week, a documentary news program went to air on the ABC containing material of a sort that used to bring down governments or at least cause some of their ministers and senior public servants to fall on their swords. Sally Neighbour’s "Ghost Prisoners" on the ABC program Four Corners was the second part of an exposé that brought together a wealth of material and expert opinion to show conclusively that Australian authorities have co-operated and will continue to co-operate with the CIA’s "rendition" program.

"Rendition" (or "extraordinary rendition") is a sanitised term to describe how terror suspects or their alleged accomplices are kidnapped and taken to countries like Jordan, Syria and Egypt and to the CIA’s own secret prisons (or "black sites") including several in Eastern European countries for interrogation. The governments of the countries involved deny it but by now the whole world knows the suspects are tortured unmercifully in order to extract information.

Neighbour’s investigation would have been particularly startling for her Australian audience. The process was laid bare using the example of Australian citizen Mamdouh Habib. The program opened with footage of a Gulfstream executive jet of the sort that took Habib from Islamabad in Pakistan to Cairo in Egypt. The program introduced British journalist Stephen Grey, author of Ghost Plane, who showed his extensive on-screen log of these rendition flights, including the one most likely to have carried the hapless Australian to Cairo in November, 2001.

Habib was subjected to brutal treatment from the moment he was snatched off a bus by local police in Pakistan three weeks after the devastating 9/11 attacks in the US. In interviews and using home-made re-enactments he videoed with his son, Habib described his ordeal in disturbing detail. Experts, such as Professor Joe Margulies who was a lawyer for a number of Guantánamo detainees who suffered a similar fate, recognised the pattern:

"Confined to a small cell, windowless, bare metal cot, 6 by 8 foot cell approximately, one blanket, one dimly lit bulb. Unmitigated violence, beatings were routine, some of them creative, some of them just brutal, thuggery."

Prior to being packed off to Cairo, Habib was prepared for the journey. His clothes were cut off, an object inserted in his anus [prisoners are routinely given an enema prior to their long flights], he was dressed in a grey tracksuit before being chained and handcuffed, drugged and had duct tape put over his mouth.

In Cairo, his treatment at the hands of Egyptian authorities was unspeakable. Egypt is a trusted friend of the US and Israel. It is also a virtual police state in its twenty-sixth year of a state of emergency with 5,000 political prisoners held without charge and, according to Amnesty International, a total of 18,000 citizens held without any charge against them. Mohamed Zarei, of the Human Rights Centre for the Assistance of Prisoners, told Neighbour that torture is automatic upon detention in his country:

"There are more than 70 types of torture that citizens are subjected to. Different types of beating — beating with sticks, with bamboo, with a hose, with their hands and legs; electrodes on the hands, on the legs, on the tongue, the genitals. They flood the cell with water. This stops the person from sleeping and he spends all night standing up."

Habib recounted his experience of most of these during his six months of hell in one of Cairo’s twelve security establishments. He also claims to have seen a man kicked to death, suffered cigarette burns, the removal of his fingernails and sexual assault using trained dogs. He was reported to have been in a very agitated state when he arrived in Guantánamo for the next stage of his nightmare.

The accounts of torture in the program were distressing. Equally disturbing, though, were the flat denials from US authorities, like current Secretary of State Condoleezza Rice and the bald-faced lie that the US would not transport anyone to a country where they believe the person may be tortured. Incidentally, the US continues to harbour admitted anti-Cuba terrorist Posada Carriles and prevent his extradition to Cuba, Venezuela or Nicaragua on the baseless grounds that he could be tortured in the jurisdiction of those countries.

Former senior CIA officials are slightly more forthcoming. They do not deny that prisoners could be tortured. Michael Scheuer was the Chief Special Advisor to the CIA’s Bin Laden Unit from 1996 to 2004:

Sally Neighbour (to Michael Scheuer): What did you expect would happen to people when they were sent to Egypt?

Michael Scheuer: Didn’t care.

Sally Neighbour (to Michael Scheuer): Did you expect that people would be tortured in Egypt?

Michael Scheuer: I can say I wouldn’t be surprised. We certainly raised the issues with the White House. Certainly within the CIA it was clear that there was no way we could tell anyone honestly that someone would not be tortured if they were taken to a particular country.

Of course, former CIA officials estranged from the methods and objectives of that organisation are more candid still:

Bob Baer, Former CIA Officer and author See No Evil: If you want to get a good interrogation you send a prisoner to Jordan, and the prisons are full in Jordan of American prisoners. If you want somebody tortured to death you send them to Syria. If you never want to hear from them again, send them to Egypt. That’s pretty much the rule.

By the end of Habib’s interrogation in Egypt, he had "confessed" to a host of crimes including being intimately involved in the planning of the events of September 11. He had trained the pilots involved and even wanted to commandeer a plane himself! Most experts believe the type of "intelligence" gathered by these cruel methods is useless, but not the gnomes within the CIA. "We’re pursuing a war. We’re pursuing it very badly, and at the moment the rendition program remains the most successful US counter-terrorism program in the history of the country", Michael Scheuer again.

It turns out that Habib was only released when it seemed his case might lift the lid on the whole seedy "rendition" process when he finally got his day in court.

Perhaps the most contemptible role in all of this was played by the Australian government and its intelligence services. Habib claimed to have met an ASIO agent soon after his detention in Pakistan. The agent told him he was stripped of his Australian citizenship and that the US authorities were now in charge of his fate, which included being "rendered" to Cairo. Habib also claims an Australian was present at a session of interrogation in Cairo. All these claims have been denied.

In fact, despite documentary evidence obtained under Freedom of Information, the current and previous Attorney General, the Foreign Minister the Commissioner for the Australian Federal Police and the Secretary of the Attorney General all denied knowledge of Habib’s rendition to Egypt. There was a Kafkaesque touch to all the denials, however. Authorities, while denying knowledge of his whereabouts, would reassure Habib’s wife Mara that he was well and being well treated.

The US experts interviewed on the program were unanimous that Australia would have been fully aware of what was going on. We are part on the very close Anglophone intelligence club that includes the US, Britain, Canada, Australia and (on again and off again) New Zealand.

Jack Cloonan, Senior Special Agent, FBI’s Bin Laden Unit, 1996-02: This is a willing partner, we’re married to each other. So to think that we, the United States, would just say don’t tell them and we’ll tell them afterwards and don’t worry about it, we’ll clear it up, you know, baloney.

This was done in a co-ordinated way. Now it may not be popular in Australia and there’s probably people looking to jump in a hole some place because they don’t want to acknowledge this, but believe me, there’s an audit trail and somebody is just not telling you the truth if they are denying this.

Mamdouh Habib is now suing the Commonwealth for complicity in his wrongful arrest and failure in its duty of care to protect him as a citizen. The Commonwealth is meeting the latter claim with the argument that no such duty exists! Habib’s passport was cancelled in 2005 and has not been restored.

CDO's claim US broker Brookstreet

To Our Valued Brookstreet Members,
Disaster, the firm may be forced to close...

Today, the pricing system used by National Financial has reduced values in all Collateralized Mortgage Obligations. Many of those accounts were on margin and have suffered horrendous markdowns and unrealized as well as realized losses.

National Financial and the regulators expect Brookstreet to pay for realized liquidated losses and take a capital charge for unrealized mark to market losses.

This firm has done a valiant if not Herculean job of managing the liquidations and capital charges to the firm's net worth and net capital. We had reduced the margin balance significantly; we had liquidated and reduced exposure by 80%.

That still left a $70,000,000 margin balance against around 85,000,000 of value. Unfortunately the pricing service used by NF revalued many CMO positions downward last night. We went from a positive net capital of 2.4 million, down from 11 million at the end of May, a negative net capital of 2.1 million. It would take a capital infusion of at least $5,000,000 to keep the company in compliance with no guarantee that additional markdowns will not be forth coming.

I cannot in good conscience request that anyone put money in the firm, I think $10,000,000 would be a minimum without consideration of the horrific customer complaints to follow.

I have told many of you that you are always in danger of not being paid on your last check when working for any broker dealer, which is why I have always paid twice per week and maintained huge net cash positions, generally in the realm of 15,000,000 on average. I will try to get enough money from our account at NFS to complete our upcoming payrolls.

Since I have been writing this letter I have received three hurried inquiries about re capitalizing the company. I will negotiate an arrangement that guarantees that everyone gets paid, to the best of my abilities. Please stay at Brookstreet at least until Friday so I may do my best for each of you.

Unfortunately we are on "SELL ONLY."

I believe I will be able to reconstitute another opportunity for everyone that will result is a minimum of change and disruption. There will be disruption.
Please give a day or so for us to come up with the best strategy. This has happened to us in one day, amazing. All of our family net worth is in the firm, please give me time to present a new plan."

This is where the shit hits the fan

Bear Stearns Staves Off Collapse of 2 Hedge Funds - New York Times: "The high-stakes game of brinksmanship began early yesterday on Wall Street, and continued throughout the day. Bankers traded telephone calls, frenetically negotiating the fate of two hedge funds.

All wanted to avoid a fire sale in the troubled mortgage-securities market, but at the same time, not get stuck with an exploding liability that could result in steep losses. The day ended with deals that appeared to have forestalled a meltdown. But questions remained about how successful they were and whether they had merely delayed the inevitable.

As the morning unfolded, lenders to two hedge funds at a unit of Bear Stearns, the investment bank, tried to ascertain what they could expect if they auctioned off mortgage securities with a face value of up to $2 billion. The solicitations were hastily withdrawn when investors reacted with little enthusiasm. But by the end of the day, some of the less-risky securities did change hands."

Not Buying It

ON a Friday evening last month, the day after New York University's class of 2007 graduated, about 15 men and women assembled in front of Third Avenue North, an N.Y.U. dormitory on Third Avenue and 12th Street. They had come to take advantage of the university's end-of-the-year move-out, when students' discarded items are loaded into big green trash bins by the curb.

New York has several colleges and universities, of course, but according to Janet Kalish, a Queens resident who was there that night, N.Y.U.'s affluent student body makes for unusually profitable Dumpster diving. So perhaps it wasn't surprising that the gathering at the Third Avenue North trash bin quickly took on a giddy shopping-spree air, as members of the group came up with one first-class find after another.

Ben Ibershoff, a dapper man in his 20s wearing two bowler hats, dug deep and unearthed a Sharp television. Autumn Brewster, 29, found a painting of a Mediterranean harbor, which she studied and handed down to another member of the crowd.

Darcie Elia, a 17-year-old high school student with a half-shaved head, was clearly pleased with a modest haul of what she called “random housing stuff” — a desk lamp, a dish rack, Swiffer dusters — which she spread on the sidewalk, drawing quizzical stares from passers-by.

Ms. Elia was not alone in appreciating the little things. “The small thrills are when you see the contents of someone's desk and find a book of stamps,” said Ms. Kalish, 44, as she stood knee deep in the trash bin examining a plastic toiletries holder.

A few of those present had stumbled onto the scene by chance (including a janitor from a nearby homeless center, who made off with a working iPod and a tube of body cream), but most were there by design, in response to a posting on the Web site freegan.info.

The site, which provides information and listings for the small but growing subculture of anticonsumerists who call themselves freegans — the term derives from vegans, the vegetarians who forsake all animal products, as many freegans also do — is the closest thing their movement has to an official voice. And for those like Ms. Elia and Ms. Kalish, it serves as a guide to negotiating life, and making a home, in a world they see as hostile to their values.

Freegans are scavengers of the developed world, living off consumer waste in an effort to minimize their support of corporations and their impact on the planet, and to distance themselves from what they see as out-of-control consumerism. They forage through supermarket trash and eat the slightly bruised produce or just-expired canned goods that are routinely thrown out, and negotiate gifts of surplus food from sympathetic stores and restaurants.

They dress in castoff clothes and furnish their homes with items found on the street; at freecycle.com, where users post unwanted items; and at so-called freemeets, flea markets where no money is exchanged. Some claim to hold themselves to rigorous standards. “If a person chooses to live an ethical lifestyle it's not enough to be vegan, they need to absent themselves from capitalism,” said Adam Weissman, 29, who started freegan.info four years ago and is the movement's de facto spokesman.

Freeganism dates to the mid-'90s, and grew out of the antiglobalization and environmental movements, as well as groups like Food Not Bombs, a network of small organizations that serve free vegetarian and vegan food to the hungry, much of it salvaged from food market trash. It also has echoes of groups like the Diggers, an anarchist street theater troupe based in Haight-Ashbury in San Francisco in the 1960's, which gave away food and social services.

According to Bob Torres, a sociology professor at St. Lawrence University in Canton, N.Y., who is writing a book about the animal rights movement — which shares many ideological positions with freeganism — the freegan movement has become much more visible and increasingly popular over the past year, in part as a result of growing frustrations with mainstream environmentalism.

Environmentalism, Mr. Torres said, “is becoming this issue of, consume the right set of green goods and you're green,” regardless of how much in the way of natural resources those goods require to manufacture and distribute.

“If you ask the average person what can you do to reduce global warming, they'd say buy a Prius,” he added.

There are freegans all over the world, in countries as far afield as Sweden, Brazil, South Korea, Estonia and England (where much has been made of what The Sun recently called the “wacky new food craze” of trash-bin eating), and across the United States as well .

In Southern California, for example, “you can find just about anything in the trash, and on a consistent basis, too,” said Marko Manriquez, 28, who has just graduated from the University of California at San Diego with a bachelor's degree in media studies and is the creator of “Freegan Kitchen,” a video blog that shows gourmet meals being made from trash-bin ingredients. “This is how I got my futon, chair, table, shelves. And I'm not talking about beat-up stuff. I mean it's not Design Within Reach, but it's nice.”

But New York City in particular — the financial capital of the world's richest country — has emerged as a hub of freegan activity, thanks largely to Mr. Weissman's zeal for the cause and the considerable free time he has to devote to it. (He doesn't work and lives at home in Teaneck, N.J., with his father and elderly grandparents.)

Freegan.info sponsors organize Trash Tours that typically attract a dozen or more people, as well as feasts at which groups of about 20 people gather in apartments around the city to share food and talk politics.

In the last year or so, Mr. Weissman said, the site has increased the number and variety of its events, which have begun attracting many more first-time participants. Many of those who have taken part in one new program, called Wild Foraging Walks — workshops that teach people to identify edible plants in the wilderness — have been newcomers, he said.

The success of the movement in New York may also be due to the quantity and quality of New York trash. As of 2005, individuals, businesses and institutions in the United States produced more than 245 million tons of municipal solid waste, according to the E.P.A. That means about 4.5 pounds per person per day. The comparable figure for New York City, meanwhile, is about 6.1 pounds, according to statistics from the city's Sanitation Department.

“We have a lot of wealthy people, and rich people throw out more trash than poor people do,” said Elizabeth Royte, whose book “Garbage Land” (Little, Brown, 2005) traced the route her trash takes through the city. “Rich people are also more likely to throw things out based on style obsolescence — like changing the towels when you're tired of the color.”

At the N.Y.U. Dorm Dive, as the event was billed, the consensus was that this year's spoils weren't as impressive as those in years past. Still, almost anything needed to decorate and run a household — a TV cart, a pillow, a file cabinet, a half-finished bottle of Jägermeister — was there for the taking, even if those who took them were risking health, safety and a $100 fine from the Sanitation Department.

Ms. Brewster and her mother, who had come from New Jersey, loaded two area rugs into their cart. Her mother, who declined to give her name, seemed to be on a search for laundry detergent, and was overjoyed to discover a couple of half-empty bottles of Trader Joe's organic brand. (Free and organic is a double bonus). Nearby, a woman munched on a found bag of Nature's Promise veggie fries.

As people stuffed their backpacks, Ms. Kalish, who organized the event (Mr. Weissman arrived later), demonstrated the cooperative spirit of freeganism, asking the divers to pass items down to people on the sidewalk and announcing her finds for anyone in need of, say, a Hoover Shop-Vac.

“Sometimes people will swoop in and grab something, especially when you see a half-used bottle of Tide detergent,” she said. “Who wouldn't want it? But most people realize there's plenty to go around.” She rooted around in the trash bin and found several half-eaten jars of peanut butter. “It's a never-ending supply,” she said.

Many freegans are predictably young and far to the left politically, like Ms. Elia, the 17-year-old, who lives with her father in Manhattan. She said she became a freegan both for environmental reasons and because “I'm not down with capitalism.”

There are also older freegans, like Ms. Kalish, who hold jobs and appear in some ways to lead middle-class lives. A high school Spanish teacher, Ms. Kalish owns a car and a two-family house in Queens, renting half of it as a “capitalist landlord,” she joked. Still, like most freegans, she seems attuned to the ecological effects of her actions. In her house, for example, she has laid down a mosaic of freegan carpet parcels instead of replacing her aging wooden floor because, she said, “I'd have to take trees from the forest.”

Not buying any new manufactured products while living in the United States is, of course, basically impossible, as is avoiding everything that requires natural resources to create, distribute or operate. Don't freegans use gas or electricity to cook, for example, or commercial products to brush their teeth?

“Once in a while I may buy a box of baking soda for toothpaste,” Mr. Weissman said. “And, sure, getting that to market has negative impacts, like everything.” But, he said, parsing the point, a box of baking soda is more ecologically friendly than a tube of toothpaste, because its cardboard container is biodegradable.

These contradictions and others have led some people to suggest that freegans are hypocritical, making use of the capitalist system even as they rail against it. And even Mr. Weissman, who is often doctrinaire about the movement, acknowledges when pushed that absolute freeganism is an impossible dream.

Mr. Torres said: “I think there's a conscious recognition among freegans that you can never live perfectly.” He added that generally freegans “try to reduce the impact.”

It's not that freeganism doesn't require serious commitment. For freegans, who believe that the production and transport of every product contributes to economic and social injustice, usually in multiple ways, any interaction with the marketplace is fraught. And for some freegans in particular — for instance, Madeline Nelson, who until recently was living an upper-middle-class Manhattan life with all the attendant conveniences and focus on luxury goods — choosing this way of life involves a considerable, even radical, transformation.

Ms. Nelson, who is 51, spent her 20s working in restaurants and living in communal houses, but by 2003 she was earning a six-figure salary as a communications director for Barnes & Noble. That year, while demonstrating against the Iraq war, she began to feel hypocritical, she said, explaining: “I thought, isn't this safe? Here I am in my corporate job, going to protests every once in a while. And part of my job was to motivate the sales force to sell more stuff.”

After a year of progressively scaling back — no more shopping at Eileen Fisher, no more commuting by means other than a bike — Ms. Nelson, who had a two-bedroom apartment with a mortgage in Greenwich Village, quit her job in 2005 to devote herself full-time to political activism and freeganism.

She sold her apartment, put some money into savings, and bought a one-bedroom in Flatbush, Brooklyn, that she owns outright.

“My whole point is not to be paying into corporate America, and I hated paying a big loan to a bank,” she said while fixing lunch in her kitchen one recent afternoon. The meal — potato and watercress soup and crackers and cheese — had been made entirely from refuse left outside various grocery stores in Manhattan and Brooklyn.

The bright and airy prewar apartment Ms. Nelson shares with two cats doesn't look like the home of someone who spends her evenings rooting through the garbage. But after some time in the apartment, a visitor begins to see the signs of Ms. Nelson's anticonsumerist way of life.

An old lampshade in the living room has been trimmed with fabric to cover its fraying parts, leaving a one-inch gap where the material ran out. The ficus tree near the window came not from a florist, Ms. Nelson said, but from the trash, as did the CD rack. A 1920s loveseat belonged to her grandmother, and an 18th-century, Louis XVI-style armoire in the bedroom is a vestige of her corporate life.

The kitchen cabinets and refrigerator are stuffed with provisions — cornmeal, Pirouline cookies, vegetarian cage-free eggs — appropriate for a passionate cook who entertains often. All were free.

She longs for a springform pan in which to make cheesecakes, but is waiting for one to come up on freecycle.com. There are no new titles on the bookshelves; she hasn't bought a new book in six months. “Books were my impulse buy,” said Ms. Nelson, whose short brown hair and glasses frame a youthful face. Now she logs onto bookcrossing.com, where readers share used books, or goes to the public library.

But isn't she depriving herself unnecessarily? And what's so bad about buying books, anyway? “I do have some mixed feelings,” Ms. Nelson said. “It's always hard to give up class privilege. But freegans would argue that the capitalist system is not sustainable. You're exploiting resources.” She added, “Most people work 40-plus hours a week at jobs they don't like to buy things they don't need.”

Since becoming a freegan, Ms. Nelson has spent her time posting calendar items and other information online and doing paralegal work on behalf of bicyclists arrested at Critical Mass anticar rallies. “I'm not sitting in the house eating bonbons,” she said. “I'm working. I'm just not working for money.”

She is also spending a lot of time making rounds for food and supplies at night, and has come to know the cycles of the city's trash. She has learned that fruit tends to get thrown out more often in the summer (she freezes it and makes sorbet), and that businesses are a source for envelopes. A reliable spot to get bread is Le Pain Quotidien, a chain of bakery-restaurants that tosses out six or seven loaves a night. But Ms. Nelson doesn't stockpile. “The sad fact is you don't need to,” she said. “More trash will be there tomorrow.”

By and large, she said, her friends have been understanding, if not exactly enthusiastic about adopting freeganism for themselves. “When she told me she was doing this I wasn't really surprised — Madeline is a free spirit,” said Eileen Dolan, a librarian at a Manhattan law firm who has known Ms. Nelson since their college days at Stony Brook. But while Ms. Dolan agrees that society is wasteful, she said that going freegan is not something she would ever do. “It's a huge time commitment,” she said.

ONE evening a week after the Dorm Dive, a group of about 20 freegans gathered in a sparely furnished, harshly lit basement apartment in Bushwick, Brooklyn, to hold a feast. It was an egalitarian affair with no one officially in charge, but Mr. Weissman projected authority, his blue custodian-style work pants and fuzzy black beard giving him the air of a Latin American revolutionary as he wandered around, trailed by a Korean television crew.

Ms. Kalish stood over the sink, slicing vegetables for a stir-fry with a knife she had found in a trash bin at N.Y.U. A pot of potatoes simmered on the stove. These, like much of the rest of the meal, had been gathered two nights earlier, when Mr. Weissman, Ms. Kalish and others had met in front of a Food Emporium in Manhattan and rummaged through the store's clear garbage bags.

The haul had been astonishing in its variety: sealed bags of organic vegetable medley, bagged salad, heirloom tomatoes, key limes, three packaged strawberries-and-chocolate-dip kits, carrots, asparagus, grapes, a carton of organic soy milk (expiration date: July 9), grapefruit, mushrooms and, for those willing to partake, vacuum-packed herb turkey breast. (Some freegans who avoid meat will nevertheless eat it rather than see it go to waste.)

As operatic music played on a radio, people mingled and pitched in. One woman diced onions, rescuing pieces that fell on floor. Another, who goes by the name Petal, emptied bags of salad into a pan. As rigorous and radical as the freegan world view can be, there is also something quaint about the movement, at least the version that Mr. Weissman promotes, with its embrace of hippie-ish communal activities and its household get-togethers that rely for diversion on conversation rather electronic entertainment.

Making things last is part of the ethos. Christian Gutierrez, a 33-year-old former model and investment banker, sat at the small kitchen table, chatting. Mr. Gutierrez, who quit his banking job at Matthews Morris & Company in 2004 to pursue filmmaking, became a freegan last year, and opened a free workshop on West 36th Street in Manhattan to teach bicycle repair. He plans to add lessons in fixing home computers in the near future.

Mr. Gutierrez's lifestyle, like Ms. Nelson's, became gradually more constricted in the absence of a steady income. He lived in a Midtown loft until last year, when, he said, he got into a legal battle with his landlord over a rent increase — a relationship “ruined by greed,” he said. After that, he lived in his van for a while, then found an illegal squat in SoHo, which he shares with two others. Mr. Gutierrez had a middle-class upbringing in Dallas, and he said he initially found freeganism off-putting. But now he is steadfastly devoted to the way of life.

As people began to load plates of food, he leaned in and offered a few words of wisdom: “Opening that first bag of trash,” he said, “is the biggest step.”

Market Ticker - housing dog crap.

Market Ticker: "Permits and housing starts came in like dogcrap, as expected. My shorts on the builders continue to look good, and I continue to ride that wave downward. In potentially very ominous news the western region of the nation showed the biggest decline in permits and starts; the western region has held up the best so far in the housing downturn. If we are now seeing this roll through to the west, we may be now seeing 'reality' intrude into the 'teflon' part of the nation, which bodes ill for future trends in this sector for the next six to twelve months.

On the goofy news page WaMu is losing some of its gains from yesterday on the clearly bogus buyout rumors. This sort of thing is getting to be so commonplace that I have to wonder if the companies are actually starting or participating in these rumors on their own! That, of course, could be highly illegal - but the pattern here, now going on for months, has to lead one to wonder.......

Potentially big, the 10 has broken the trading channel to the downside on yield. But it has also decoupled from equities - this sort of move a few days ago would have resulted in a monster rally in equities - its not happening now, with all the indices ignoring it today. As a consequence we have to take the 10 off the list of 'market movers' for the time being. The next few days are 'do or die' in terms of "

BAD NEWS BEAR By RODDY BOYD - Business News | Financial | Business and Money

BAD NEWS BEAR By RODDY BOYD - Business News | Financial | Business and Money: "June 20, 2007 -- The end came yesterday for a Bear Stearns hedge fund that had been teetering on the edge of solvency for a week, when Merrill Lynch announced that an $850 million auction designed to recoup some of its loans to the fund was back on.

The fate of Bear's High- Grade Structured Credit Strategies Enhanced Leverage fund - forced to suspend redemptions after reporting a 23 percent loss - had been the focus of intense negotiations between Bear and its biggest rivals. While sporting $600 million under management, the Bear fund was massively levered, bringing its portfolio size to over $6 billion.

On Monday, Merrill delayed an auction in order to give Bear and its adviser Blackstone a chance to put together a bailout plan. Bear's plan, presented yesterday afternoon, had too many strings attached for the fund's lenders. The firm offered to pump $1.5 billion in life-saving cash into the fund, but only if its creditors agreed to hold off on margin calls and chip in another $500 million.

A Bear spokesman declined comment.

The bond market's most battered players - the hedge funds and trading desks specializing in mortgage-backed securities - now have to handle a total of $2 billion or more hitting a market that is still licking its wounds from the f"

Commodities Are for Crafy Investors" by Dudley Baker

FSU Editorial: "Commodities Are for Crafy Not Crazy Investors" by Dudley Baker 06/20/2007: "First, contrary to all the real experts, I can't predict the future of the economy and financial markets with any degree of certainty. I especially can't time anything that would make sense on which to base trading decisions. Equally I can't compete with the smart guys, the institutions with all their specialized people, formulas, software and money to do everything top drawer. Nor can I beat them to the trigger or the exits. So attempts to time the market, alter my portfolio balance between sectors, investment vehicles and geographic regions is pretty much hopeless for me. I therefore do not trade, rather I attempt to invest.

When I take a position it pretty much stays in place with a little pruning now and then, here and there. What I look for is capital preservation before growth. I look for risk minimization rather than making the big score. I come to my conclusions mainly by informing myself of economic and political fundamentals. Hence technical charts used by traders tend to be of marginal value to me, but are nonetheless a serious curiosity.

What I do know are some very large and unassailable global economic realities...such as peak oil and permanently high energy prices, the power of environmentalists and the man made CO2 boogeyman on public policy and politicians, the time horizons of public policy decision makers being the length of time to the next election, that inflation begins with money supply and credit that is in excess of real economic growth, that the conflict between pluralist and secularist cultures with Islamic fundamentalism is only beginning and will present huge problems for the foreseeable future, that Asia in particular is increasingly driving the fundamentals of the global economy with huge internal demand for infrastructure and internal consumer growth, that the demand driven by that growth has placed the resource/commodities sector in a long term secular growth mode which has more than several years yet to run, that both agricultural commodities and most minerals fit into this category, that subsidizing of corn based ethanol is an agribusiness and political wet dream, a huge technological bummer, does nothing for energy self sufficiency, doesn't add any net energy to world supply and will cause the price of animal feed and human food to dramatically escalate in price. I also add governmental budgetary and trade deficits, debt and huge magnitudes of unfunded liabilities coupled with highly leveraged private sector debt, much of which is unregulated and not even understood....... Enough of this, but I can add many more and discuss the implications of each at a later date.

What I conclude is that our infamous Goldilocks economy of the past and present cannot last forever when we have "givens" of the kind noted above.

Therefore I protect my equity with precious metals in their various forms and grow it with key commodities such as those with tight supply/demand fundamentals. Energy and in particular oil, uranium and natural gas head the list. Certain base metals critical to the production of infrastructure which use copious quantities of steel and ancillary products top my list of growth potential. While I haven't taken a position, I think certain agricultural commodities must also be on one's "must have" list.

Summary? Carefully select key commodities and investment products and companies from locations with stable politics and currency growth that reflects economic growth - read Canada and Australia. Sit tight and watch the inevitable. What is that? Clearly currencies growing at 3+ X the rate of their economies create conditions for future price inflation and perhaps hyperinflation given the growing concerns over declining values of the currencies of those countries. I look to the future where serious crises will be currency and interest rate driven emanating from reckless financial policies and practices. In the meantime I carry on with life convinced of the merits of my analysis and not at all worried about the short term rhythms of the S&P, DOW, NASDAQ or bonds. To me their machinations are nothing more than background noise which deflects one from the key issues.

I am currently fully invested, confident in my analyses as outlined above, and sitting back enjoying life to the fullest...good wine, good friends and good times - as my choice of commodities continue to escalate in value. Yes, as someone once said 'I am crazy like a fox' and laughing all the way to the bank!"

KPMG warned of ‘death spiral’ in tax shelter fraud case-Business-Industry Sectors-Banking & Finance-TimesOnline

KPMG warned of ‘death spiral’ in tax shelter fraud case-Business-Industry Sectors-Banking & Finance-TimesOnline: "KPMG, the accountancy firm, told the US Justice Department that it would unleash a “nuclear bomb” that would leave more than 1,000 companies without an auditor, if it indicted the firm for selling fraudulent tax shelters, according to newly released internal documents.

The Justice Department began to investigate KPMG in 2004 for allegedly helping wealthy clients to save money by setting up illegal tax shelters. The investigation came after Arthur Andersen’s indictment in 2002 for obstructing the US Government’s inquiry into Enron.

Roger Bennett, KPMG’s lawyer, argued that his client’s indictment could wipe out one of the four remaining large accounting groups, as the Enron inquiry had eradicated Andersen.

Mr Bennett told prosecutors at a meeting on March 22, 2005, that “a death spiral is going to start, and KPMG will be out of business”."

Droughts here and coming

Winter (Economic & Market) Watch » Droughts: "The Treasury International Capital Flows for April showed some major shifts in allocation. Net capital flows into the US were a whopping $111.8 billion for the month of April. That was in comparison to $30.1 for March. It is interesting to note here that foreign buys of US Treasuries were almost non-existent. They came in at a mere $376 million or a year low. That was in comparison to $30.51 billion for March and $18.57 billion for February. China actually decreased their treasury holdings to $414 billion from $419.8 billion last month.


Actually we can take this a step further using Fed custodial data and see that since April 5th, FCBs have liquidated $6.3 billion in Treasuries but have bought a stunning $58.3 billion in housing agencies. I have been arguing that it is this activity that is distorting markets and keeping yields or risk premiums artificially low on mortgages, right as credit conditions in housing are worsening."

Got to agree with Edmund here..

Edmund M. McCarthy is President and CEO of Financial Risk Management Advisors Company. This piece was originally published in his newsletter.
Prudent Bear
Five Years Of Supposed Prosperity! Cost? Possibly The End Of About A Century Of Hegemony Inducing Growth?

China buys a piece of Blackstone, a company being perhaps the ultimate in capitalistic finance. When the Yellow Peril/Communists start buying the private equity players, something has certainly changed. Not too long after the gang in Beijing joined the rush to have their investments complemented by participation in leveraged buyout players, global interest rates started a significant climb. Coincidence? Time will tell but there has to be a suspicion that there is some congruity.

If you are a Kudlow and Co. disciple, the natural reaction is to continue to embrace “goldilocks” and utter or mutter, the old Mad comic’s character, Alfred E. Neuman’s” phrase, “What! Me Worry?”

If ridiculously Big numbers, comprising monstrous aggregations of capital/liquidity alarm you, the new acronym, SWF or Sovereign Wealth Funds comes very much to mind. Global reserve assets, including the pitiful $78 billion in the U.S., now total (Another Monstrous number), about $5.4 TRILLION. Of that total, approximately $2.5 Trillion are in or headed for one of these SWF creations. The purpose of having such an instrument for the sovereign creator is to enhance return on the pile. This isn’t done by continuing to sit in U.S. Treasuries where the return has been denuded by the crowded trade already in there with you.

We had the dotcom/telecom etc. bubble succeeded by the GSE induced residential bubble, succeeded by the structured finance/financial engineering residential bubble, succeeded by the CRE/financial engineering bubble, succeeded by the private equity/leveraged buyout/return of the conglomerateurs/no covenant, no guarantee bubble, and they were all looking a bit exhausted. Are we now to witness the SWF buys all of the foregoing bubble? Since the total amount of reserves available for growth and movement into these SWF’s is more or less the annual amount of the United States Current Account Deficit of $1 Trillion, on top of the aforementioned $2.5 Trillion approximately already thrown in, this could be an incredible self-sustaining bubble if only viewed from the aspect of resources and liquidity. In some of the more obscure financial publications, there has recently been some cognizance of this possibility. All this in aid of finding the next bubble since our past thoughts that we would run out of big enough new bubbles to keep the game humming have obviously been in error. It is also worthy of note that a requisite of a successor bubble is to have resource and leverage sufficient to equal or exceed its fading predecessor. Also, for the last five years or so, beneficent interest rates globally have been, at a minimum, a strong aid, perhaps an inherent necessity to this leverage addicted wealth creation methodology.

Most of the liquidity/inflation generated by the massive $1 Trillion+ U.S. annual foreign deficit has, so far, been channeled into: first U.S. Treasuries and Agencies, and then corporate or other debt, with the local currency generated to purchase the $ going, until recently, into residential or commercial real estate and/or local equity markets. Neither the ROW (Rest of the World as it is called in the Federal Reserve Z1 report), nor the bubble blower (The United States) has had terribly painful domestic inflation at the consumer level. In fact, asset inflation in houses and investment indexes has been a pleasant trend for all of these nations.

As the ability to extend asset inflation bubbles reaches or exceeds market possibility, the inflation increasingly spills over into the more visible parts of the consumption economy. Central banks are increasingly forced to recognize the Hydra-headed monster they have accommodated, and raise rates/tighten liquidity. Some such as Kuwait and Syria have been so extreme as to sever their link to the $. New Zealand shocked the markets with an 8% short term rate. Euro rates and other global rates are up and/or rising and, it can be argued, are pushing up U.S. rates concomitantly. This is the counter force that we would argue will constrain the potential glee in the markets in anticipation of the Petro states, and The BRIC (Brazil, Russia, India and China) nations, as well as reserve rich others, such as Korea, Taiwan, maybe even Japan, from all buying their very own Blackstones. Obviously, should they be such buyers, with the leverage the Blackstone’s can employ, the limits to an SWF bubble are imponderable but truly immense.

Another restraint to this emerging new global bubble is the question of to whom do these reserve rich players sell their enormous holdings of U.S.$ Treasuries and Agencies, purchased, at the best, at breakeven yields today, with much of the portfolio surely underwater with Greenspan rates in effect for many of the last five years.

With the U.S creating well over a $Trillion of new sovereign paper in recent years, obligating the buyers thereof to create the equivalent in local currency and find a home for the dollars bought, the merry-go-round has been continuously working with the recycling of those dollars back into the sovereign or near sovereign (Agencies) debt of the U.S. There was thus a natural purchaser as the dollars issued by the U.S. Treasury. The SWF’s can be a disturbance on the merry-go-round as they look for Yale Endowment yields.

Yet another potential problem for those embracing “goldilocks” (Particularly for those surveying the global scene from behind the diaphanous blur of the United States knowledge screen) is the perhaps invidious state of the longstanding global reserve currency, the United States $. For going on a century, Seigneurage privileges (globally accepted) have enabled the U.S. to print money to pay global debts. This is a rare historic privilege accorded few sovereign entities. Even more rare is the status accorded the currency on emergence from World War II; that of sole hegemonic issuer. More rare still was continuing global acceptance when “Guns and Butter” Nixonian policies severed the currency’s last link to outside control of issuance, the supposed redemption availability in bullion. Basically, at that point, the global reserve currency stands on “The full faith and credit” of the U.S. Government. We forswear politics in these ramblings but would not be surprised if “some of the people, some of the time” are not as completely convinced of the value of such full faith and credit.

After a series of successes from the 1987 dip onward at thwarting any economic downturn with lowered rates and tsunami’s of liquidity, the Fedheads really went to an extreme with their 1% interest rates more than 5 years ago, ushering in the most massive global debt bubble, arguably, in the history of mankind. This crescendo of debt permits the globe to have simultaneously expanding economies virtually everywhere, a couple of exceptions such as Lebanon and Zimbabwe out there to be noticed by the few still thinking that a debt culture must eventually be constrained. As noted above, deluging liquidity everywhere has enabled simultaneous global expansion, unusual phenomena in the history of mankind.

A couple of thoughts here. The U.S. expansion, driven by the Fed cuts, and largely centered in 1.Real estate of all varieties 2. Buy-out/M&A/Leveraged lending. 3. Financial Engineering/Structured Finance creation, distribution and fee administration and investment and 4. The massive expenditures on Defense related and Security related to prosecute the ever-expanding utilization of militant activities. The cuts of interest rates by the Fed bought this going. (Oh, we have forgotten the “saving” temporarily of such industries as “auto” with low interest rates.) There are signs of satiation and aggravating credit risk in the credit sensitive areas of these sectors. Oh, by the way, do any readers actually give credence to the Commerce Dept. consumer inflation statistics (If so, read John Williams’ “Shadow Government Statistics” to find the 10.2% REAL consumer inflation rate in the U.S.) In any event, the reported (not the nonsensical core) rates last week were demonstrating that lifestyle is being negatively impacted in the U.S. by dripover inflation.

The foreign central banks largely followed ours into the trough of rates. And their expansion started a little later. Asset inflation, as in the U.S., took over first. The two culprits in the U.S. stand out in the foreign markets: residential real estate and equity markets.

Nevertheless, the inevitable occurs; housing bubbles, affordability problems, equity bubbles that produce P/E’s that are untoward and, finally, lifestyle inflation that impinges on the central banks. As an example, the ECB, a central bank that actually has an inflation containment mandate in its constitution, is raising rates and warning of probable necessity to do more. A rising rate currency looks attractive to a stable one, possibly accounting for some $ defection in the recent past.

I met a young entrepreneur who opened and expanded a bikini factory in Brazil some years ago. The enterprise was/is a success, however, the climbing real is rendering him non-competitive. His solution: sell out to one or another of the private equity guys currently soliciting and go into the wealth management business. Such examples and the potential consequences are seldom seen in the U.S. media.

The Belief In Our Own Worldview Is Our Own Most Powerful Intellectual Imperative!

Here we hearken back to what we believe to be the consensus “worldview” in the U.S.; most particularly in the financial sectors thereof. Obviously not universal and imbued with the author’s prejudices, a construct thereof follows:

The U.S. economy is emerging from a “soft” landing. Although occasioned by the residential bubble in significant part, particularly sub-prime, that area is contained without widespread contagion and employment, production, efficiencies through privatization, growing exports and technological breakthroughs will lead to a new, burgeoning expansion.

Accompanying this renewal of “Goldilocks” seems to be a guiding belief that once out of the trough, another expansion similar to the pleasant 2002-2006 will follow as night follows day as has occurred for approximately 20 years.

This worldview, predicated on the Universal Empire the U. S. was at the beginning of the new millennia, is not a worldview shared by the ROW!
1. This 5-year period of prosperity, kicked off by the massively excessive Fed rate cuts and ensuing global liquidity started from a pitiful foreign reserve assets number globally (Much of which had been accumulated by Japan as it sought to recover from the bubble we taught them). The budget surpluses in the U.S. more than offset the then midget trade deficit, and the currency stood on a pinnacle. With the aforementioned exception of Japan and the inscrutable Swiss, the reserves and currencies of most of the rest of the world ranged from pitiful to disastrous. Argentina went on to a sovereign default and theft from creditors, Brazil devalued, Russia defaulted etc.,etc.

Five years later, the players have the aforementioned $5.4 Trillion in reserves and the U.S. currency is held aloft on generosity after an average fall in the 30% range. The domestic economy, driven by the afore-mentioned continuous bubble machines, has exhausted a debt laden U. S. consumer to continue to propel the machine. Foreclosures and defaults are hitting new records, not at the bottom of a recession but with record low unemployment rates. The only game still running at breakneck speed is the leveraged private equity play, still battening on low relative rates and tax advantages. The press of ROW, by and large, see and present this worldview in contrast to Bubblevision and Goldilocks.
2. We normally eschew the “It’s Different this time” approach as an exegesis for a thesis but find it necessary when confronted by the unprecedented.

Five years ago, the financial sector, both within the U.S. and globally, while having small entries into some of the following fields of risk and finance, was struggling to recover from the blows of the Asian debacle, the Russian default, 9/11 (although it actually served as an economic expansion ignition.), the 2000/2001 U.S. Recession and the afore-mentioned Latin imbroglios. True, the U.S. banking system had been hit by some, many or all of these, depending on the institution. Frankly, this opened the door for the previously intermediary giant Broker and Universal banks to vault into the new world of Financial Engineering/Structured Finance on a global basis.

Five years later, world finance has significantly and nearly totally changed. As an example, Fed NY Governor Corrigan only had to hit the rolodex for a dozen and a half names to suck up $4 Billion to stop the panic about LTCM. Today he admits that the number affected by a systemic event could go into very large numbers.

There really is no infrastructure in place to deal with a contagional systemic financial crisis! One has not yet occurred in the era of RMBS’S, ABS’S, CDO’S, CLO’S, SYNTHETIC CDO’, ‘S’S and the legions of forms of CDS’S and their progeny, CPDO’S, CPPS’S etc.

I recently looked at an 190 page report on this “market” which has enough other gibberish in it to confound any but the math ph’d’s who create, manipulate sell, buy and, occasionally run from this stuff. It is mindboggling. In previous efforts, we have described how BBB- securities can be transformed into 80% AAA. The weekend WSJ described how a fund of some of this stuff is coming unglued. One of the players, Merrill, has seized and is auctioning some of the collateral, impolitely screwing up “rescue” loans and other attempts to salvage. Mixed in will be some of the insurers, in front of the pension funds, endowments, foundations etc. presumably the ultimate owners of this smoldering wreck. Remember, we are at the beginning of the problem in residential real estate with still record unemployment! There is only some $7 Billion directly and peripherally mixed up in this Bear Stern’s directed vehicle, but it could serve as a eye-opening lesson as it burns on the way to sinking.

3. We mentioned the insurers above. At the beginning of the decade and in the early stages of the post 2000 downturn, these two entities guaranteed and/or absorbed into portfolios hundreds of billions per year in mortgages and mortgage-backed securities. Then it became apparent that the Financial results reported by these entities were suspect, that Management possessed less integrity and they were clueless as to the risks they were assuming. Investigations, Resignations and ability to provide limitless buying strength for the mortgage origination world disappeared!

The world of Financial Engineering/Structured Finance has largely operated without the two prior foremost liquidity providers, Fannie and Freddie, as they languished in Congressional hearings on their fraudulent or incompetent doings. They have recently re-emerged as large players as investigations came to a close, reparations were determined and some semblance of financial reporting was re-instated. The recent return of the yield curve to a positive slope has also been a tremendous help to these inveterate players of this type of curve with their Congress-given subsidy and their willingness to make noises about the alleviation of the Brokers sub-prime default and foreclosure-laden results to years of Financial Engineering/Structured Finance garbage.

In order to perform the legerdemain necessary to take less than investment grade and other slightly unsavory assets to the public type buyers described above, they had to throw in some sauce. This came, in the absence of the GSE’s from the private world of insurance, the AMBAC’s, MBIA’s, MGIC’s, RADIAN’s etc. Functioning in a not dissimilar way to the rating Agencies, these worthies would look a prospective issue over and then insure the higher rated tranches. Much like a GSE guarantee, such insurance would serve to make the issue palatable to the institutional buyer as all the due diligence necessary.

We were recently privileged to read an in depth credit review of the Insurer group with particular emphasis on the Ambac and MBIA numbers. We remember a scholarly look at MBIA a couple of years ago which would have given pause to thoughtful analysts except for coincidence with the Greenspan rush to Zero rate structure. The insurers have responded to slow times in the low rate environment by diving headlong into the Structured Finance world. The thing about insuring munis is that you either have taxing power (full faith and credit) or revenue generating capability (toll roads, airports) etc. It is not clear that these worthies fully understood that, in the absence of the appreciation which appeared to happen inevitably to houses in the immediate period in which they leapt headlong into insuring CDO’s composed of BBB- or equivalent to get them to AAA, that houses don’t mystically create debt service revenue, they eat it!

The leverage these critters have taken on historically may have been speculative when they were playing muni’s but it is outright outlandish in the game of Structured Finance. 900 to 1 leverage makes LTCM look cautious. Equity and Reserves are infinitesimal and not growing in proportion to the non-muni game they are playing.

The afore-mentioned analysis asks: “Who is holding the bag?” In the game, and points to the insurers. Since a 10% drop in house prices wipes out their equity, we agree with the analysis that they are too slender a reed to support the ratings they carry and that there is going to be tremendous disillusionment when the axe falls. We would then repeat the question, Who is holding the bag? The ultimate buyers of these things are the ultimate bag holders, pension funds, the equivalent of Orange Counties all over the country, university endowments trying to emulate Yale, maybe the Gates Foundation but certainly the foundation industry and others seeking the yield in alternative investments that will pay for their commitments.

Not to be forgotten are the latter day monopolists, the rating agencies, Moody’s S&P, Finch etc. Their revenue streams went ballistic when Wall Street created the Age Of Structured Finance. They get paid for rating. Isn’t there a conflict in here somewhere? In my days as a practicing credit guy, the watchword was that the rating agencies were a lagging indicator. I will never forget classifying a then fabled Texas bank substandard after a merger in the ‘80’s, only to have a giant argument with headquarters when Moody’s gave them a AA rating. They failed. Put all of this together and maybe this time it Is Different! Only not the kind of different I want to be a creditor of!

4. What else has happened while the United States happily built houses, bought cars and remodeled for the last five years as the Financial sector, particularly Wall Street emerged as the most significant earnings stream in the S&P? Well, going back to that word used before, “worldview,” the U.S. convinced itself that the most important problem internationally was something called “The War on Terror. Hey, I’m against terror too. I just think it’s necessary to know and be sure who it is we need to go to war with. We don’t seem to have done too good a job on that front. It has been expensive but not effective. In a different “worldview”, the costs might have been ascertained in advance. The swing from a Federal surplus to a deficit, the curtailment of a current account deficit before it headed into dangerous territory, the maintenance of a sound currency, the maintenance of world/global respect and, at least, reasonably cordial relations with sovereign states all have a value to be measured, before lost, in pursuit of consumption and the War On Terror.


During this semi decade, the ROW, on its proverbial back when we began this crusade, reinvigorated. A possible “worldview” NOW must encompass a China with $1.3 Trillion in reserves and an industrial/manufacturing base of unbelievable proportions. Courtesy of Chian Kai Shek, their WW2 leader, they sit on the Security Council and are in a position to permit Iran to become what it wishes. Five years ago would have been a more propitious time for being bellicose about Iran. On the same Council is a Russia with $400 Billion in reserves, risen from the defaulting dead.

I don’t know a thing about Putin’s “soul” but I do know he and his Administration are ex-KGB, jingoistic about their nation, loaded with petroleum and still a powerhouse in terms of weaponry. We probably could have bought the weapons five years ago with a fraction of the funds since gone in the aforementioned War and its counterpart, the War on Drugs.

Net net, in the opinion of the writer, there is a very real danger that our worldview for the last five years has risked a century long hegemony as the reserve currency nation as well as creating a Credit Bubble, largely Unregulated, that has expanded far beyond the worst nightmares of the writer. It is also our opinion, as a long time credit troglodyte, that this bubble is leaking air and is in danger of bursting. With no infrastructure to deal with the first truly global bubble, we have an interesting time in front of us.