Did Goldman Sachs Short Itself and Short the Market?

Rumors were circling today. If it did, that's chutzpah at its best (or worst, depending on your perspective). If GS the Vampire Squid is going down, everybody else is going down!

And they did, big time. Major US indices may have bounced back and ended with 1.6% loss at most (S&P500), but individual stocks in the indices went down much, much more, regardless of whether they are financial stocks or not.

Did Goldman Short Itself, Reuters Reports Goldman Was Told In Advance It Faced SEC Action (4/16/2010 Zero Hedge)

"Time for the SEC to take a look at what bets Goldman's prop desk, and material affiliates as well as hedge funds that are close to Goldman's flow traders, were taking on Goldman's stock over the past few days. If indeed Goldman shorted itself, bought SPY puts, bought octuple leveraged negative financial ETFs, or something else of the sort, on material non-public information, it would be time to shut the firm down." [Emphasis is original.]

And:

Talk From The Pits: Goldman Sold 1,000 Large S&Ps Earlier (4/16/2010 Zero Hedge)

"From the open outcry pits:

Goldman sold 1,000 big SP today over 1,200.00. Was it just a hedge because they
KNEW the SEC would do nail them to the cross? Is that insider trading? Who knows
how many tens of thousands they sold in the ES?

"We can hope the SEC still hasn't blocked Zero Hedge and is reading these very pertinent questions. "

For more on what the SEC's action on an Op-Ex cay did to the market, GS share price, and April option prices (someone made an immoral amount of money), take a look at my trading blog.

(And oh BTW, Mercury Retrograde starts on April 17 at Taurus, the bull.)

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Just In: SEC Charges Goldman with Fraud Over CDO

Just broke on CNBC apparently. (I heard it on a stock message board.)

SEC Charges Goldman Sachs With Fraud On Subprime Mortgages (4/16/2010 Business Insider)

"This just broke on CNBC, and the NYT has a huge story about this already....

"Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

"The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers."

For more on Goldman Sachs (and others) structuring CDOs that they designed specifically to fail, read here, here, here.

And this is what the news did to the stock market the moment it broke:

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PIMCO's Bill Gross: Real Estate Could Beat Stocks, Bonds

PIMCO's Bill Gross says both residential and commercial real estate markets are reaching a bottom, and may be a better bet than stocks and bonds.

He is the one (I think) who started the "new normal" concept to describe the new, post-crisis economic and financial reality of low growth and low return. He was also the first one to call on the federal government to support mortgage-backed securities issued by Fannie Mae and Freddie Mac. The government did, to whom Mr. Gross sold his vast holdings that he had amassed. I believe he did the same with his Treasury securities holding.

(His monthly Investment Outlook on PIMCO's site is well worth reading, by the way. On this blog I have a link to PIMCO's market commentary page under "Market / Economic News, Analysis, Commentary" section - scroll down the left column.)

When he says something, I listen, as he always seems to be one step ahead of everyone else when it comes to investment.

Real Estate Could Beat Stocks, Bonds: Gross (4/15/2010 CNBC)

"Real estate is nearing a bottom and eventually could be a better bet for investors than stocks or bonds, Pimco's Bill Gross told CNBC.

"Both commercial and residential real estate are reaching a bottoming point and possibly even prepared to turn higher, said Gross, CIO of Pacific Investment Management Co., or PIMCO, the world's largest bond fund.

"With stocks likely to return 5 to 6 percent and bonds 3 to 4 percent, he said, investors would be wise to start looking at real estate opportunities.

""Ultimately the riskier assets will be the less the risky assets," he said. "I wouldn't suggest moving into those particular sectors at the moment but ultimately risk and reward go together."

"Lower debt and better lending rates will make real estate attractive, he added." [The article continues.]

However, when he says publicly that the real estate market is poised for better return, he has probably invested in real estate at a very attractive price and he is quite ready to sell it to you.

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UK Telegraph: Japan Mulls Monetization of Debt, Yen Devaluation

The true believer of Keynesianism sallies forth to where no other developed country has gone before. (Not after the World War II, that is.)

UK Telegraph's Ambrose Evans-Pritchard reports that the Democratic Party of Japan (DPJ) has drafted a bill that will require the Bank of Japan to monetize the government debt, set the "inflation target" at 2%, and devalue Japanese yen by 30%. And they call it a radical thinking.

Japan mulls monetisation of public debt and yen devaluation
(Ambrose Evans-Pritchard, 4/14/2010 Telegraph)

"A draft by 130 lawmakers from premier Yukio Hatoyama’s Democratic Party of Japan said the country needs a radical shift towards growth policies, calling for an inflation target above 2pc. The exchange rate should be steered to ¥120 against the dollar, from the current ¥90.

"Shizuka Kamei, financial affairs minister [and former policeman], said the central bank must monetise government debt to support the market for state bonds and prevent deflation becoming deeply lodged in the economy.

"The Bank of Japan’s governor, Masaaki Shirakawa, told lawmakers that it would illegal [sic] to fund state spending by printing money. “History has proven that central banks directly buying government securities caused severe inflation and dealt a blow to the economy. The BoJ is now providing adequate funds,” he said." [The article continues.]

The BoJ governor is right. This is crazy.

Japan's industrial output is on the upswing, so is the housing market. Stronger economies in Asia are revaluing their currencies upward against the basket of major currencies (China, Singapore). And Japan wants to debase their currency to cause inflation.

As if inflation is the sign of strength. Japan may not have had a significant inflation in its lost two decades, but it hasn't really had a significant deflation either. Monetary base has been stable, and price of goods and services has been stable. However, since the government takes away more from its citizens - increased taxes, increased national health care insurance premiums that hit pensioners particularly hard, the average Japanese do not have a sense that they are enjoying extra purchasing power.

The so-called "structural reform" by the previous administration under Prime Minister Koizumi has all but destroyed the employment safety net. Japanese saving rate has plummeted from high teens to low single digits, not because of higher spending but because of lower income. Now the Hatoyama administration wants to further destroy the savings (or what's left of them) of the citizens by debauching the currency intentionally.

Ever patient and philosophical, the Japanese would probably say "Shoganai (nothing we can do about it)" and accept their lot.

I hope they are buying gold and silver while yen is still strong.

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Rasmussen Poll: Ron Paul 41% Obama 42% in 2012 Matchup

a virtual tie.

Election 2012: Barack Obama 42%, Ron Paul 41%
(4/14/2010 Rasmussen Reports)

"Pit maverick Republican Congressman Ron Paul against President Obama in a hypothetical 2012 election match-up, and the race is – virtually dead even.

"A new Rasmussen Reports national telephone survey of likely voters finds Obama with 42% support and Paul with 41% of the vote. Eleven percent (11%) prefer some other candidate, and six percent (6%) are undecided."

The Political Class is a totally different story. According to the poll, 58% of Main Street voters prefer Ron Paul, while 95% of the Political Class prefer Obama.

Not surprisingly, the Republicans seem to have mixed feelings about Ron Paul. The Republican Party establishment have been trying to marginalize and ridicule Ron Paul (and his ever-growing supporters) for a long time.

What's interesting though is this: Significant chunk of Republicans haven't decided what to think of him.

"Twenty-six percent (26%) of GOP voters think Paul shares the values of most Republican voters throughout the nation, but 25% disagree. Forty-nine percent (49%) are not sure.

"Similarly, 27% of Republicans see Paul as a divisive force in the party, while 30% view him as a new direction for the GOP. Forty-two percent (42%) aren’t sure."

The Republican Party leadership must be scared.

A 19-year-old college student whose political role model is Ron Paul has become the new mayor of a Wisconsin town, with a solid support from townfolks fed up with their city council not listening to them and wasting money on projects no one wants.

Maybe, just maybe, a change (a real one) is afoot.

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CDOs and Mel Brooks

Huffington Post's David Fiderer, who has written detailed, well-researched posts on the events that led to the September/October 2008 financial near-meltdown, tells us that CDOs that may have helped crash the housing market which in turn crashed the financial markets which then crashed the global economy has a lot in common with Mel Brooks' classic - "Springtime for Hitler", a play within a play.

What's the common thread here? Both were designed to fail. ("Springtime for Hitler" succeeded, much to the chagrin of the producers. So they had to bomb the theater.)

Do Business Schools See Why CDOs Are Compared to "Springtime for Hitler"? (David Fiderer, 4/12/2010 Huffington Post)

"The Magnetar Trade was taught in the best business schools long before This American Life likened it to "Springtime for Hitler."

"For those unfamiliar with the fraudulent scheme portrayed in Mel Brooks' classic movie and Broadway musical, The Producers, "Springtime for Hitler" was an enterprise specifically designed to fail. It was a play thought to be so insipidly tasteless that it would close on opening night, so the investors, who laid out cash far in excess of the play's actual production costs, would never question where all the money went.

"New reporting in ProPublica offers hard evidence that Magnetar, a hedge fund group based in Chicago, had designed a series of subprime mezzanine CDOs that were all but guaranteed to fail. Magnetar made a bundle by doubling down on bets that its own CDOs, and similar financial instruments, would fail. This idea was not unique to Magnetar. Hedge fund manager John Paulson pursued the exact same investment strategy. The Magnetar story was first reported in the Wall Street Journal back on January 14, 2008, one day before John Paulson put Alan Greenspan on his payroll." [The article continues.]

So what's the big deal? John Paulson did it. Goldman Sachs did it. Why can't they?

The big deal to me is that this story has had hardly any traction in the mainstream media. That these big-shot bankers and fund managers deliberately created financial vehicles that had no intrinsic value for the express purpose of letting them fail. Or worse, making it sure they fail so they could profit. In the process, they at least aggravated the collapse of the housing market if not downright triggered it.

Now, many of the same savvy fund managers have bought up distressed mortgage-backed securities on the cheap, the same securities that they helped tank in price. They are waiting, for now. You can bet they are not waiting for the turnaround of the housing market. They are waiting for the federal government to make them "whole".

The federal government is beyond broke at this point. (See the debt clock on the upper left corner of this blog.) Who's going to pay to make rich investors and fund managers "whole"? Taxpayers, including those distressed homeowners who will be losing their homes.

It's such a comedy, if you are not party to it. Outdoing even Mel Brooks.

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OT: Apple iSpecs?

I've been waiting for a decent pullback on AAPL (that's the stock symbol for Apple Inc., who launched its latest "i" - iPad) so that I can buy in. In the past, the stock usually had a significant pullback after the company actually started selling its much-hyped product. I was waiting for $225, but I have a feeling I may not see that price anytime soon. Just a hunch, and this:

iSpecs: Apple eyes up 3D future with projection glasses that will play films on the move (4/12/2010 Mail Online UK)

"Apple could soon be venturing into the world of 3D, after they filed a patent application for electronic spectacles that would show films on the move.

"The head-mounted gadget would have a slot for an Apple iPhone or iPod.

"A special 'smart' lens in the device, nicknamed iSpecs by gadget fans, would project the images from the screen so they could be viewed comfortably.

"The lens would be able to split the image into two different frames creating a 3D effect. This could be used to watch blockbusters such as Avatar and Alice in Wonderland.

"The application explained the form would allow the user to 'relax while viewing image based content on the head-mounted device because he does not have to hold onto the portable electronic device.'

"The gizmo would also be fitted with a camera to stream video from the outside world. Infrared sensors embedded in the frames would detect if anyone approached the wearer, and the real-time video would pop up on a screen inside the glasses." [The article continues.]

In other words, the wearer of this device would perceive the real world through the camera and sensors, not with his own eyes and senses. It is getting too creepy for a Luddite like myself (though Matrix remains my favorite movie...). Or I should say the future as described by Neal Stephenson is finally arriving.

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Paul Krugman Strikes Again

Speaking of inflation, New York Times columnist Paul Krugman is one of the pundits calling for more inflation as something good.

I simply don't have stamina this morning to pick apart his strange and simplistic (and often inaccurate) argument, so I will link two articles, one by Peter Schiff on his April 9 Op-Ed on the need for the government to inflate more, and another by Bill Anderson on today's Op-Ed on the need for the government to basically micromanage who gets what money (fresh off the government press) to achieve the noble goal of "protecting consumers".

Krugman Strikes Again (Peter Schiff, 4/12/2010 Euro Pacific Capital via Lewrockwell.com)

Regulate Inflation? I Don't Think So! (Bill Anderson, 4/12/2010 Krugman-in-Wonderland)

Taken together, the Nobel laureate columnist is strongly advocating more government-induced inflation which is good for the debtor government and destructive to citizens, and more government regulation which will further restrict the flow of capital, bloodline of a free market. I don't understand his blind faith in all things "government", the benevolent and omniscient dictator who knows what's good for you and me.

He is (or was, at least) also a staunch defender of Fannie and Freddie; "Fannie and Freddie can’t be allowed to fail", he opined back in July 2008.

I was totally at a loss when he once said people should buy cheap houses in middle-of-nowhere inland suburban sprawl, instead of buying houses in pricier neighborhood. To him, it was irrational that people wanted to live in nicer neighborhoods, paying more for the housing.

Russians must be really shaking their heads. (And Swedes, too.)

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We Need A Little Inflation, Media Pundits Say

I say we've had more than enough inflation over the past 100 years.

The Bureau of Labor Statistics (BLS) has a cute little java application called "CPI Inflation Calculator".

We've been assured by the Federal Reserve chairmen (both Alan and Ben) and by the government statisticians in the Bureau that price inflation in the US is very mild; that there's no reason to worry about runaway price inflation; that it is price deflation we should fear. Obliging MSM says what we need is a little inflation and it's a good thing for a debtor country like the US.

Students of Austrian economics say that price inflation is the inevitable result of monetary inflation. Under Chairman Bernanke, the Federal Reserve doubled the monetary base in the process of supporting the financial market. This elevated monetary base hasn't resulted in elevated money supply, as banks continue to hoard, not lend. Not yet, and not unless they are forced to.

So, all is well then?

Not really. Let's now use the BLS's nifty java app to see how much today's $1000 is worth in different years past...

$1000 in 2010 is worth:

• $989.83 in 2009 dollars;
• $901.08 in 2005 dollars;
• $794.50 in 2000 dollars;
• $703.14 in 1995 dollars;
• $603.02 in 1990 dollars;
• $380.18 in 1980 dollars;
• $186.86 in 1971 dollar, when Nixon unilaterally abolished dollar-gold convertibility (Nixon Shock);
• $45.68 in 1913 dollar, the year the Federal Reserve was born.

US dollar has lost over 95% of purchasing power in 100 years; the bulk of that loss has occurred after the Nixon Shock.

For more on different inflation rates and their impact on the purchasing power of the dollar, check out my post from last year.

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