For starters, Guaranty Financial of Texas went belly up late Friday and secured a spot in the history books. With $13 billion in “assets,” the bank is the third largest to fail this year and tied for the 11th biggest bank failure in U.S. history.

Even more interestingly, the FDIC brokered Guaranty’s assets to Banco Bilbao Vizcaya Argentaria, a bank from northern Spain. We’re surprised on two fronts here: 1) That a bank from Spain — strapped with double-digit unemployment and a wretched housing bust — wants to bring their euros to I.O.U.S.A. 2) That BBVA already has a huge presence in Texas. With this acquisition, they will be the fourth largest banking chain in the Lone Star State. That could be an interesting trend to watch.

Three other banks failed along side Guaranty: CapitalSouth, First Coweta and ebank. That brings the yearly total to 81.

This should put the FDIC’s deposit insurance fund on its last legs. At the beginning of 2008, the FDIC’s bank failure war chest had over $52 billion. At the end of the March 2009, the last time the FDIC has given us a look into the DIF, they had $13 billion left. 60 banks have failed since, including Guaranty and Colonial, which by themselves took out half of that remaining $13 billion. Only the FDIC can say with accuracy if there is any money left, but this chart gives you a pretty good idea of how the trend is shaping up:

The DIF does have a source of income — it taxes member banks a significant “insurance fee.” But we have to think that the DIF is still in bad shape, perhaps even empty… and that the FDIC will soon be hitting up someone (Tim Geithner, Joe Taxpayer and/or U.S. banks) to refill their coffer.

The FDIC will provide their second-quarter report tomorrow, which among other things will include a look into the DIF and their infamous bank “problem list”… could get ugly. We’ll keep you up to speed.

“Recent bank failures remind us of the problem loans festering on small and regional bank balance sheets,” writes Dan Amoss, “and that many of them are marking loans at fantasy levels. The secondary market value for some of the worst loans, like construction loans, is 20 or 30 cents on the dollar.

“There’s a backlog of at least a few hundred insolvent banks that need to be shut down and sold into stronger hands. Bank stock bulls are ignoring the credit losses yet to be recognized, so there are lots of shorting opportunities in the sector. Many banks will not be able to “earn their way out” of their credit losses.

“The problem is, there aren’t many strong buyers with lots of capital out there. Those that are, like private equity groups, are buying only after the FDIC agrees to eat most of the credit losses, and the buyer is gifted with the remaining shell — the profit-making engine of spread lending.

“It’s understandable that the FDIC doesn’t want much publicity about the Deposit Insurance Fund; it wants to maintain the public’s confidence that it can ‘insure’ all deposits with just a few basis points of capital reserves and skimpy premium income. The fund is clearly not adequate to cover the bank failures still in the pipeline, so we’ll see another ‘special assessment’ imposed on all other banks, which will ultimately be passed on to depositors via lower interest rates.”

Critical banking analysis has been one of the hallmarks of Dan’s Strategic Short Report. His brand of scrutiny gave readers 162% gains betting against Allied Capital (NYSE:ALD), 220% on PNC Financial and the whopping 462% winner shorting Lehman Brothers. Today is the last day we are offering his latest financial short play for just $1. Capture this truly rare opportunity by clicking here… midnight tonight, the deal’s off.

Source: The Banking Crisis Cometh

About six months ago, Goldman itself was on its hands and knees looking to get a part of Hank Paulson’s $700 billion TARP fund. Back then, Goldman posed a “systematic risk” to the system. Handily, the firm’s former CEO happened to be Treasury Secretary. And Goldman was granted bank holding status and TARP rescue money lickety-split.

Back in the last depression, the Pecora Commission went straight for bankers’ gonads. Examples were set. Bigwigs were forced to resign. And landmark legislation was put in place (think Glass-Steagall) to keep the “banksters” in their place.

These days are different. Washington seems less keen to go after their pals on Wall Street or ask too many awkward questions. Instead, the pols are rejoicing in Goldman’s record profits and desperately trying to forget about all those billions in tax dollars they recently handed over to the nation’s top bankers.

Of course, not all bankers are created equal. And former Goldman Sachs CEO and then Treasury Secretary Hank Paulson had no intention of extending your hard-won tax dollars to just any old bank.

Goldman’s competitor Lehman Brothers needed cash too. It had earlier claimed to be “too big to fail” and a “systematic risk.” But the feds were having none of it. Bank holding company status was withheld. And Lehman brothers, like Humpty Dumpty, “had a great fall.”

(Oddly, or perhaps not oddly at all, considering the established close ties between Goldman Sachs and Washington, Lehman’s demise has greatly helped Goldman. The reduction in competition has greatly benefitted Goldman’s bottom line.)

So what is Goldman doing with the money? Well, we hate to break it to you, folks, but it’s not saving it for a rainy day. According to Barron’s, having saved roughly $600 million by issuing FDIC-backed debt with yields reflecting the government’s guarantee, Goldman has managed to set aside some $11.4 billion for compensation in this year’s first half. This works out to an annualized $770,000 “for each chief, cook and bottle-washer at the firm.”

Of course, saving for a rainy day is something a bank might do if it knew that it couldn’t rely on its connections in the upper echelons of government (and taxpayers’ generosity) should things get a little hairy again down the line. Or as Bill puts it less prosaically: “like a welfare queen in a pink Cadillac, it spends every penny, confident that it can lean on the feds next month as well as the last.”

But surely, some would say, Goldman’s bumper quarters mean the banking crisis and the economic crisis are over. Surely it’s now time to rush back into stocks, switch on Cramer and let the money start rolling in again. Perhaps, dear reader, perhaps. But as always, things aren’t quite what they seem. This from Bill in yesterday’s Daily Reckoning:

But now, look. After all our whining and complaining about the bailouts – they must be working, right? The big banks are making money again… big money. And that must mean the economy is on the mend. They’re lending… they’re speculating… they’re rolling the dice and… hallelujah… a pair of boxcars!But wait. Ken Lewis of Bank of America says, “Profitability in the second half of the year will be much tougher than the first half…”How come?

Because the banks’ core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back – out of earnings. If the borrower is counting on higher house prices…or higher stock prices… to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up… or they may go down. And if they go down, down goes the lender’s collateral too… and his hope of getting repaid.

The banks made big mistakes in the bubble years. And now they’re paying the price. But so far, they’ve only made the first installment payment. Subprime loans started going bad two years ago. Then, people began losing their jobs… and loans of all sorts were in trouble.

There is no sign that this process is over. Instead, it is merely proceeding in good order… just as you’d expect.

California lost another 65,000 jobs in June. And in Pennsylvania, 17,800 people are running out of jobless benefits. This group is on the cutting edge of a huge new trend – people not only unemployed, but out of unemployment benefits. One estimate says there will be more than half a million of them nationwide by the end of September. You think they were cutting back on spending last month? Let’s see what they do in October. And let’s see what happens to their debt… those Alt-A, jumbo, and prime mortgage loan…

… and let’s see what happens to credit card debt…and to commercial loans too. There’s a report that New York commercial properties are running up towards a 23% vacancy rate… Shoppers not shopping… stores and restaurants closing their doors… unemployment going up – sounds like the depression might not be over yet…

Stabilising stock markets and the dollar’s rise over the past week after the U.S. government announced measures to clean toxic assets off banks’ balance sheets put a cap on gold prices, undermining the yellow metal’s appeal as a safe haven.

Still, uncertainties over the sustainability of a stock market rally and the dollar’s rise, as well as the global economic outlook, kept intact investor appetite, resulting in record holdings of gold-backed securities.

“The stock market is stabilising and investors are stopping their safe-haven buying of gold,” said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong. At the same time, there was nothing to justify selling of gold because it was not clear how the economy fares, he said.

Gold was at $921.05 per ounce by 0240 GMT, little changed from New York’s notional close of $922.10. Gold has held firmly above $900 thanks to buying related to gold-backed securities.

At current levels, gold is up about 5 percent on the quarter but 10.6 percent below an all-time high of $1,030.80 hit a year ago. Bullion has recovered about 4 percent from a six-week low of $882.90 hit on March 18, but is 8 percent off the 11-month high above $1,000 set in February.

It has been six months since the collapse of Lehman Brothers, which aggravated the financial crisis, and the global economy and financial system have yet to show a clear sign of a turnaround, traders said.

“Unless the economy really starts working and stock markets rally, and banks start lending and businesses revive, people will not jump out of the gold market,” Leung said.

Trading was subdued due to the month-end and as some players turned cautious ahead of U.S. nonfarm payrolls data due later in the week. There were not many expectations for a meeting later in the week of the G20 group of the world’s 20 biggest economies, traders said.

The world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust , said holdings rose 2.45 tonnes to a record 1,127.44 tonnes on March 29.

For details on the gold holdings of the ETF listed in New York and co-listed on other exchanges, click on: http://www.exchangetradedgold.com/iframes/usa.php

Tokyo shares fell 1.8 percent on Monday as investors locked in profits from last week’s sharp rally.

The dollar firmed after the euro posted its biggest one-day fall since early January on Friday.

Later on Monday, data on British consumer credit and mortgage lending for February and euro zone March business climate sentiment will be released.

Prices as of 0250 GMT Metal Last Change Pct chg YTD pct chg Turnover Spot Gold 921.65 -0.45 -0.05 4.72 Spot Silver 13.29 0.02 +0.15 17.40 Spot Platinum 1129.00 6.00 +0.53 21.14 Spot Palladium 215.50 -2.00 -0.92 16.80 TOCOM Gold 2926.00 -34.00 -1.15 13.72 13488 TOCOM Platinum 3585.00 -58.00 -1.59 35.18 7031 TOCOM Silver 416.40 -7.00 -1.65 30.41 221 TOCOM Palladium 690.00 -16.00 -2.27 25.45 291 Euro/Dollar 1.3269 Dollar/Yen 97.68

TOCOM prices in yen per gram, except TOCOM silver which is priced in yen per 10 grams. Spot prices in $ per ounce.

March 30 (Reuters)

It is worth noting, that the Federal Reserve has already dropped the Fed funds rate to a historically low range of 0-0.25% and now it is desperately trying to use other unconventional methods (quantitative easing) to stimulate the economy. In my view, this latest development of the Federal Reserve monetizing debt is inflationary and confirmation that the Federal Reserve wants to debase the U.S. dollar. It is worth noting that the total debt in the United States now exceeds $60 trillion, and its economy is around $14 trillion. So, the United States is already bankrupt, and the only way it can ever hope to repay this gigantic sum is through monetary inflation and debasement.

Allow me to explain:

Suppose your grandparents borrowed $100,000 from their friends roughly 50 years ago. Back then, $100,000 was a lot of money, and the chances of your grandparents ever repaying this loan were slim at best. However, thanks to monetary inflation and the debasement of the U.S. dollar, today, $100,000 isn’t a very large sum of money. Therefore, your grandparents would find it much easier to repay their debt.

Turning to the present situation, the United States owes its creditors a gigantic amount of money and a debt so large that it can never hope of repaying it in today’s dollars. So, the United States has two options:

a. Default or bankruptcy
b. Monetary inflation

Given the fact that the United States is still the world’s largest economy, owns the world’s reserve currency and has a democratically elected government, I think we can pretty much rule out the possibility of sovereign default. Therefore, you can bet your bottom dollar that the United States will try its best to inflate its way out of trouble. Remember, politicians borrow money when it buys them a loaf of bread and they repay it when the same money is worth only a slice of bread!

It is my firm belief that over the years ahead, the United States, and all other debt-laden nations in the West, will engage in massive money-creation in order to debase their currencies and dilute the purchasing power of paper money. Remember, monetary inflation is a debtor’s best friend, as it makes the debt easier to service and repay.

On the other hand, monetary inflation goes against the interests of savers and creditors. Given the fact that most of the ‘developed’ nations are up to their eyeballs in debt, you don’t have to be a genius to figure out that monetary inflation is our future. At present, the global economy is dealing with deflationary forces due to credit contraction in the private-sector. However, even now, total credit in the United States is expanding due to rampant borrowing by the U.S. government. So, I don’t expect deflation to take hold; rather, I anticipate accelerating inflation, which has always led to rising asset and consumer prices.

It is worth noting that apart from the Federal Reserve, other nations have also started monetizing their debt. Recently, the Bank of England announced that it plans to buy GBP150 billion worth of its government debt by creating money out of thin air. Needless to say, such a move is inflationary and terrible for the health of the British currency.

Now that we have established that monetary inflation is our future, let us examine which currencies and assets will maintain their purchasing power. If history is any guide, nations that engage in monetary inflation always diminish the purchasing power of their currency. So, in the years ahead, we can expect currencies in the West to depreciate in terms of purchasing power, but the trouble is that none of the fundamentally sound nations want a strong currency either! As the world engages in competitive currency devaluations, I expect all the currencies in the world to lose significant purchasing power against hard assets. Therefore, in the years ahead, precious metals and other commodities with intrinsic value should appreciate considerably. Even the values of fundamentally sound businesses with clean balance sheets should skyrocket as a result of inflation.

Last week, in the aftermath of the latest announcement by the Federal Reserve, we have seen significant strength in precious metals, crude oil and grains. Conversely, we have seen a huge decline in the U.S. dollar. If the Federal Reserve continues on this inflationary path, we can expect a resumption of the commodities bull-market and renewed weakness in the U.S. dollar.

Contrary to popular opinion, I am of the view that most commodities and stock markets have seen the lows for the entire bear market and we may be in the early stages of a new cyclical bull market that could last for a few years. Now, I am aware that my bullish stance may lead to ridicule from some of my readers, but I would like to point out that new bull markets are always born during abject pessimism and skepticism. Even if some asset prices break to fresh lows in the near-term, I suspect such a move will prove to be a ‘head fake’ and prices will soon rebound. So if you have a 4-5 year investment horizon, now may be a good time to convert some of your temporarily powerful cash into hard assets (precious metals, energy and industrial metals), related producing-companies and sound businesses in the fast-growing Asian economies.

At the current levels, the energy complex looks extremely attractive and should prove to be a fantastic long-term investment. After years of extensive research, I am convinced that the world’s oil production is peaking and we are likely to see much higher energy prices in the future. So, investors may want to add to their positions in upstream oil/gas companies and the energy service stocks. Finally, it looks as though the precious metals complex is becoming over-heated and long-term investors may want to wait for the usual summer correction before adding to their positions in physical gold and silver.

Regards,

Puru Saxena

Source: Monetary Inflation Is Our Future

This from Money Morning:

The consensus estimate of earnings for the Standard and Poor’s 500 Index for 2009 is currently about $83. The index itself is currently standing at about 904. That means the market is trading on only 10.6 times next year’s forecast earnings, far below the historical average multiple.

So it is a screaming buy, right?

Not so fast.

“Consensus” estimates of earnings lag reality substantially. Because they include an average of all earnings forecasts over a considerable period, forecasts made in late September would still be included in today’s consensus estimate. But in a period such as the present, when reality has changed substantially since September, the official consensus forecast may differ wildly from what most analysts currently believe. The $83 number is thus a lagging indicator, which doesn’t take account of financial sector disasters, sharply slowing output, or tight credit conditions.

Most analysts, finally made more cautious by five successive quarters of declining earnings on the S&P 500 index, currently believe that the S&P 500 will earn about $60 in 2009. What’s more, David Rosenberg of Merrill Lynch & Co. Inc. (NYSE:MER), who has been exceptionally bearish for some time with an estimate of $50, has been joined in bearishness by Goldman Sachs Group Inc. (NYSE:GS), which has brought its group estimate down to $53.

That’s much more scary. Taking the average S&P 500 multiple at around 14 times earnings, an earnings estimate of $60 would put a “median” estimate of the index at 840; an earnings estimate of $50 would put it at 700. Take a bear market low at 10 times earnings, and you could postulate an S&P 500 low of 600 or even 500.

Still, bear market earnings estimates can be taken only so far, especially those of analysts. After all, on July 7, 2008, a joint report by two top houses predicted that the S&P 500 index would have its best six months since 1982 in the latter half of 2008. That’s about as wrong as they could possibly have been!

Still, one should not be surprised by their failure; while one of the two well respected but wrong houses was Deutsche Bank AG (NYSE:DB), the other was – Lehman Brothers Holdings Inc. (OTC:LEHMQ). Truly, a lot can change in six months.

2009 Bears

Nevertheless, while it’s clear that from an earnings viewpoint 2009 should be approached with caution, it is also clear that some sectors and countries will do reasonably well, while others have futures that are truly scary.

Some of the more bearish sectors and regions include:

• Financial services: The entire industry appears to be scaling down to a fraction of its 2007 size, as many of the innovations of the last 20 years turn out to have been spurious. Investment management also is destined to be much less innovative and less lucrative in the wake of the Bernard Madoff scandal. Eventually, banks and other financial institutions will emerge from the downsizing, but 2009 is much too early to expect that.

• Real estate and construction: Housing won’t bottom out until mid-2009 at the earliest, and will recover only very slowly thereafter. Non-residential construction will also be very limited, as offices, stores and hotels will be in glut. There may be some money to be made in road construction from President-elect Obama’s infrastructure program, however.

• Emerging markets with no money: The emerging markets that rely on borrowing to fund themselves will be out of luck, as debt will be expensive and hard to come by. Eastern Europe and most of Latin America will be in for a thin time, as their balance of payments and in many cases budget deficits will take years to straighten out.

• Western European countries with high cost bases: The Western European countries with expensive labor and high taxes will find life tough in 2009, particularly if they previously enjoyed a real estate bubble or were big in finance. Germany will probably do fine because its high-skill labor is highly competitive and it had no housing boom; Britain, Spain and Italy will be in a much more difficult situation.

2009 Bulls

Conversely, there will be sectors and countries whose earnings can be expected to hold up well, and whose shares are worth looking at:

• Gold mines: Inflation is almost certain to return in 2009, because of all the fiscal and monetary stimulus. That has to be bullish for gold, other precious metals, and mining companies.

• U.S. exporters: The rest of the world will show some economic growth, and the U.S. budget and payments deficits and expansionary monetary policy will make U.S. exporters benefit, unless they are involved in businesses that depends heavily on tourism, such as aircraft.

• Healthcare providers: Pharmaceutical companies may have problems with President elect Barack Obama’s healthcare plans, because the returns for patented drugs will be reduced, but hospital chains and other healthcare providers will probably benefit from an overall increase in government healthcare spending.

• Asian countries: In general, Asian countries will do better than the United States and Western Europe, because their cost bases are less overblown and their competitiveness is greater. China and India may have problems, but I like the prospects for Korea, Taiwan and Japan and for companies in those countries involved primarily in their domestic markets. If the Indian election in spring goes to the pro-business BJP party, it will be a buy too; if not, India will have difficulty funding its overblown government sector.

• Brazil: Brazil has a well-balanced economy, less foreign debt than it used to have, and a monetary policy of high real interest rates. It can, therefore, afford to expand domestically through monetary means in a way no other country can.

Source: Gloomy Earnings Prospects Hold Key To Stock Buying

This from The Daily Reckoning:

“Until today or tomorrow, the typical turkey enjoyed a fairly decent life…” commented our friend Nassim Taleb, in Zurich yesterday.

Yesterday [Wednesday], the stock market was quiet. The Dow ended up 36 points. Oil held at $50. Gold too…it stayed right where it was, at $820 an ounce.

But the slaughterhouses and gold mints worked overtime.

“You can understand how fraudulent most economic analysis is,” Nassim explained, “just by looking the life of the turkey. The animal is fed for 1000 days…and then it is killed. So, if you plotted out the turkey’s life on a chart, it would look great for 1,000 days…each day, the food arrived reliably, and each day, the turkey gained weight. The turkeys would look around and say they were enjoying growth and a bull market. Momentum investors would see it as an opportunity. The quants would run linear regressions on the data and prove that the risk was minimal. ”

Ben Bernanke would describe the turkey’s life – with no setbacks – as the product of a “great moderation.” Turkey stockbrokers would assure their clients that nothing had ever gone wrong in the turkey’s life. Turkey econometricians and theorists would come up with explanations for why the turkeys’ growth would continue forever and they’d pat each other on the back for having finally mastered the “turkey cycle.” Turkey politicians would run for re-election on the grounds that they had helped create a better world. And turkey economists would project further weight gains…until the turkey was the size of a hippopotamus

Then, come Thanksgiving, and all of a sudden, something goes wrong. Alas, all the turkeys’ theories, models, and conceits were for the birds.

“Rare events can’t be modeled,” Nassim continued. “Because they are too rare. You can’t get a statistically reliable sample. Alan Greenspan recently explained that he ‘had never seen anything like this before.’ Well, of course he had never seen it before. It never happened before.

“Because these events are so rare, they are also completely unpredictable…and usually much worse than you can expect. Like Thanksgiving Day for the turkey.”

The turkeys are getting the axe…but they’re having some revenge: Americans are getting the axe too.

Unemployment is rising sharply…and tomorrow, when Americans sit down to their turkey dinners, they will be dining in houses worth about 18% less than they were worth a year ago. Not only are their houses worth less…their values are falling faster and faster.

There’s no sign of a bottom to the housing market. In some areas – Los Angeles, Miami, San Diego, and San Francisco – the loss in housing wealth already exceeds 26% from a year earlier.

But don’t worry, dear reader. Houses are not dot.coms. And they’re not turkeys. They won’t go to zero. And they won’t disappear.

Besides, they were never financial assets in the first place. They’re just places to live. If you’re happy with your house…you don’t care what its price is.

On the other hand, if you’re not happy with your house, this is the time to start looking around. Our guess is that house prices will go down another 20-30%. Then, you will be able to get houses at very reasonable prices… Unless you want to live in Detroit – where you’ll be able to get a house at a remarkable price.

Meanwhile, the economy itself is sinking too. GDP faded in the 3rd quarter – down 0.5%. Most likely, the US economy will begin walking backwards faster too. Which means…more businesses will fail…more people will be out of work…and those people with any money in their pockets will be very careful about how they spend it…

…which will, of course, make things worse.

All this is a natural, normal response to a credit bubble. It gets bigger and bigger – and then it blows up. Loans are made…and then they are collected. Mistakes are made…and then they are corrected. People do stupid things…and then they pay for them. People go mad on the way up…then, they go mad again on the way down. What could be simpler?

But if you think the feds are going to stand still and let something natural happen, you have not been reading the papers. They’re “pulling out all the stops” to try to prevent the correction…

So far, the feds’ efforts have been futile. But we have little doubt that they will get the hang of it eventually. If there is one thing the feds can do it is inflate the money supply. Ben Bernanke stakes his reputation on it.

And here is Thomas L. Friedman explaining what is needed:

“…a massive stimulus program to improve infrastructure and create jobs, a broad-based homeowner initiative to limit foreclosures and stabilize housing prices, and therefore mortgage assets, more capital for bank balance sheets, and most importantly, a huge injection of optimism and confidence…”

Friedman is the voice of the masses. But the intellectuals agree. Bloomberg reports:

“’You want to do everything you can when you’re facing the threat of a deflationary breakdown of the economy,’ says Michael Feroli, a former Fed official who is now an economist at JPMorgan Chase (NYSE:JPM) & Co. in New York. He sees the central bank cutting the overnight lending rate to zero in January and holding it there throughout the year.”

“Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson are being forced to pull out the stops because the extraordinary actions they’ve taken so far have failed to gain much traction. Credit markets are collapsing, stock prices are plunging and the world economy is sinking into a recession.”

“The biggest mistake Obama could make,” says Yale economist Jeffrey Garten, “is thinking this problem is smaller than it is. On the other hand, there is far less danger in over-estimating what will be necessary to solve it.”

Yeah…go ahead and err on this side now…. Why not? You erred on the other side. That is about the depth and breadth of thinking on the issue – at least from the people who never understood what the problem was…and now offer to solve it.

And it was to one of these same hacks whom Obama has turned for his secretary of the Treasury – Timothy Geithner. Here is another Hank Paulson. Unlike Hank, he did not work on Wall Street. Instead, he was supposed to be keeping an eye on Wall Street – as head of the New York Fed. “He was in the room,” when all the bailouts and busts happened, said one Wall Street pro. AIG (NYSE:AIG), Bear, Lehman, Citigroup (NYSE:C)– he was in on them all. And he was at least peeping through a keyhole when Wall Street was enjoying its wild party. He saw the deals go down…the leveraged debt…the private equity buyouts…the subprime razzle-dazzle…the quants…the bonuses.

We don’t recall a single word of warning. But then, he’s a young guy…maybe he’s learned something.

But we have a pretty strong hunch he’ll be at the Treasury Department not to further his education…but to play his role in the developing tragedy. He’s meant to try to stop the correction. Rather than examine his lines carefully to see if they really make sense…he’ll speak the speech given him. “Stimulus,” he will say. “Protect jobs…save homes…avoid financial meltdown…,” he has heard them before. He will say them again. And why not? Almost everyone wants to hear them. They all want bailout. Almost everyone wants to be saved. Almost everyone wants to duck the bill collector…and stop the hangman.

We all have to play our roles, dear reader. We are all turkeys…waiting for the axe.

Source: We Are All Turkeys

This from InvestmentU:

Structured products are securities that are sold as an opportunity to enjoy substantial gains with full principal protection.

For example, an underwriter might offer investors the upside potential of the S&P 500 – or a substantial percentage of that upside – over a certain period of time (say, five years) while guaranteeing no less than full value of the initial investment at maturity, even if the index goes down.

(Or, instead of the S&P 500, the investment might be linked to Asian currencies, or commodities, or something else.)

How can you offer all or most of the upside of a risky investment with a principal guarantee? Well, in the early days, Wall Street would take U.S. government zero coupon bonds – which sell at a discount and pay zero interest, but gradually compound in value until they mature at $1,000 – and combine them with index options.

So, for instance, if you invested $100,000 – and investors tended to bet large since their principal was guaranteed by Uncle Sam – $80,000 might go into zero coupon bonds and most of the rest into S&P 500 call options.

Most of the rest? Well, there were Wall Street fees that had to be covered, of course.

Nothing was wrong with these early investments, really. But they were nothing more than a gimmick. You could buy the zero coupon bonds and options yourself and achieve the same thing, saving yourself the fees that Wall Street imposed when it created these products.

Unfortunately, something happened along the way that changed the game completely. Yields on government bonds came down. And the cost of buying index options went up, especially in bull markets.

Yields on U.S. Treasuries just weren’t high enough to make this game work anymore. So instead of investing most of the money in U.S. government bonds, Wall Street firms substituted their own unsecured debt instead. This was disclosed in the prospectus, of course. And it seemed like no big deal as long as these Wall Street giants remained healthy.

But they didn’t.

Structured Products Are An Investor’s Nightmare

Investors who bought structured products from Lehman Brothers, for example, are today standing in line alongside the firm’s other creditors.

These “principal-guaranteed” securities are now selling for 10 cents on the dollar, according to SecondMarket, Inc., a specialist in illiquid assets.

SecondMarket says it has already heard from investors holding more than $2 billion worth of Lehman structured products.

The firm estimates that small investors bought $34 billion of these products through October of this year alone. This surpasses the more than $33.5 billion that were bought last year.

(In truth, of course, these products are sold, not bought. No one wakes up and says “I think I’ll invest in a structured investment product today.”)

Last week The Wall Street Journal told the story of Charles Brooks, a physician in Allentown, PA:

• He put a significant sum in two Lehman structured products because he liked the idea of having some exposure to market gains along with protection from losses.
• Today he says these “protected” assets are worth approximately seven cents on the dollar. Sixty-five years old, he is now delaying his retirement planning.
• And he is angry at Wall Street. “There’s no end to things they can invent that seem to me little more than a gamble for the enjoyment of the inventors,” he says.

I don’t fault Dr. Brooks for believing that a note guaranteed by Lehman Brothers was pretty safe. Ninety-nine percent of investors would have made the same assumption 12 months ago.

Structured Products Are A Wall Street Gimmick

The shame, really, is that by buying these structured products, he was sold a Wall Street gimmick. There is nothing magical about these products that offer huge upside potential with a principal guarantee.

After all, I could take $100,000 from you, put the vast majority of it in U.S. government zero coupon bonds and use the balance to play roulette at the Bellagio for five years. If I win, you would get back a lot more than $100,000.

And if I lost everything, which of course I would, I could still guarantee the full return of your hundred grand when bonds mature.

Like I said, gimmick.

There are two lessons here for every investor:

The first is as old as investing itself: If it sounds too good to be true, it probably is.

Number two, however, is just as important. Whenever you hear that an investment, an insurance policy, an interest payment, a stock dividend, or a particular return is guaranteed, be sure to ask the next question: By whom?

Source: Structured Products: Another “Safe Investment” Bites the Dust

The article starts off, “Angry Hong Kong investors, some banging gongs and others waving banners, scuffled outside a bank on Friday as frustration mounted over losses tied to investments linked to failed U.S. bank Lehman Brothers,” and “Several hundred investors, many of them elderly retirees, marched to eight banks which had sold Lehman structured products, demanding compensation for their losses” because the banks were guilty of “misleading investors on the risks involved.”

And it wasn’t just them, either, as “Investors in Singapore and Indonesia have also hit the streets in protest, expressing outrage that the failed products they bought were actually complex derivatives.”

Now, normally you would think, “What a bunch of dummies! Demanding compensation for their losses just because some slick stock and bond hustlers talked them into sinking all their hard-earned money into some now-worthless crap? Hahaha! Welcome to the real world! And now they want their losses covered by the government? Hahaha! What do they think this is, communist Russia? Hahaha!”

Apart from the fact that the English philosopher Herbert Spencer said, “The ultimate result of shielding men from the effects of folly is to fill the world with fools”, the joke is actually on me, as these Asian investors actually think that they deserve compensation for their stupidity by using the stupidity of us Americans as a model, as our stupid government and central bank are creating untold zillions of dollars to do that very thing!

And part of it is first jacking up Total Fed Credit to get the new credit into the banks, and sure enough, it was up another stunning $62 billion last week, taking the total to a staggering $1,872.948 billion, which is up an also-staggering $1,010.325 billion in the last year! My God! Total Reserve credit was up more than 117% in a year! A freaking year! Twelve months! More than doubling!

And if you are one of those people who write to me and say that I am just a stupid guy with bad breath, poor posture, and minimal social skills, I can only say “Touche!” but one of the few things I do know is that an increase in the money supply means that there will be an increase in consumer prices as all those additional dollars end up bidding for things in one marketplace or another, thus driving up their prices, and pretty soon the prices of food and energy and housing and everything else are rising so much that it is causing distress among the poor, and they are rioting in the streets, while the middle class will be drained of every penny’s worth of buying power, gold will be shooting to the moon in response to a devalued dollar, and you Earthlings will realize the True Mogambo Significance (TMS) of having gold, guns and grub, because no matter what happens, with those you can buy your way out, shoot your way out, or wait out a siege, in which case you will want to stock your bunker with tasty grub, extra ammo, and enough booze to deaden the horror of watching the outside world disintegrate under the onslaught of so much inflation.

On the other hand, one can infer the same thing from the fact that the new Gross Domestic Product Deflator is 4.2%! In other words, inflation in prices is, across the entire aggregate economy, 4.2%! Yikes!

This is so horrifying that during Halloween a few weeks ago, I made a last-minute decision to change my choice of costume. Originally, I was going to dress up as the beautiful ballerina whose heart has been broken in a tragic misunderstanding and ultimate betrayal, and who is now packing an Uzi to track down that lying bastard and make him pay, big-time.

Instead, I went as inflation; I stuck the head of a doll into my mouth so that it looked like I was eating somebody alive. When I knocked on the door, a man answered and we all said, “Trick or Treat!” and then the guy looked at me and asked, “What are you supposed to be?” I told him, “I am inflation, and I eat people alive!”

Mostly, the joke fell flat, and the rest of the conversation quickly turned to why a raving lunatic my age would be trick-or-treating among children, and wearing such a disgusting and incomprehensible costume, too.

I told him, “Because the new GDP deflator was 4.2%, you moron! And if that is not enough of a ‘trick’ for you, then you are too stupid to have candy, and so I am going to take all yours! Hahahaha!” Then I made a grab for the bowl of candy he had, and we tussled back-and-forth over it, candy flying everywhere, him yelling to his wife to “Call the cops! Call 911!” and me yelling back that he is a moron who doesn’t deserve any damned candy because inflation in prices, as a result of this insane inflation in the money supply means he won’t have any candy because nobody will be able to afford to buy candy, and the inflation is going to kill everybody, including him and all these stupid little kids, whereupon all the kids ran away, screaming and crying, and I was yelling, “If you think that this 4.2% GDP deflator is bad, you little morons, wait until the rest of the inflation in prices gets here as a result of the trillions and trillions of new dollars in various stimulus packages being concocted Around The Freaking Globe (ATFG), with more and more to come!”

By this time, I suddenly lost my grip on the candy bowl and the door was rudely slammed into my face. I kept ringing his doorbell and yelling for him to open the door and get a taste of the misery of inflation that all these trillions of new dollars are going to cause, and how he is an idiot to be cowering in there and spending his money on stupid trick-or-treat candy instead of spending it on gold and silver.

I was getting louder and louder, until I saw a police car turning the corner. Then I figured I had imparted enough wisdom, and snagged enough free chocolate candy, for one night.

It was the least I could do to help a neighbor!

Source: Shielding the World from Financial Folly

1.) They’re Riskier Than Other Investments

While this was once true, if you’ve been following the economy recently, you know that’s no longer the case. In an age when blue chips like AIG (NYSE:AIG) or Lehman Brothers can swing just as wildly as the crankiest penny stock, even the big names are no sure thing.

To be fair, penny stocks are far from risk-free. But it’s that risk that brings with it the reward potential penny stocks are known for.

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The “Black Market” Secret Used by Famous Investors

Even world-famous investors first cut their teeth in the investing world by raiding “Black Market” stocks like these…

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2.) They’re Hard to Buy

Just in case this myth wasn’t busted when I wrote Taming the Wild West of the Market back in May, I’m back to reiterate.

Buying penny stocks isn’t necessarily any harder than buying another type of investment. You just place a trade with your broker, or purchase the shares through an online brokerage account, and watch the magic happen. Your broker might have a different commission structure for penny stocks, so as always, it’s best to ask your broker about how trading penny stocks will affect your brokerage account.

3.) You Have to Be An Insider to Make Money with Penny Stocks

Believe it or not, being an insider doesn’t garner you much of an advantage as a penny stock investor. That’s because Wall Street is way to preoccupied with more expensive stocks to give penny stocks a second thought.

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“Tier Two Equities” That Can Pay Five and Six Times More Than Regular Stocks…

For years, professional investors have quietly used “tier two equities” to lock into America’s best blue chips at a discount…for much bigger gains…even during crashing markets…well, now it’s your turn to cash in…

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4.) OTC Stocks Aren’t as Legitimate as Blue Chips

Don’t think that just because a stock isn’t traded on a major exchange like NYSE or NASDAQ that the company is somehow defective.

In fact, the opposite can sometimes be true. Exchanges like NYSE have burdensome listing fees and requirements that preclude smaller companies from getting listed. Some of the most compelling investment stories were those of small companies listed on over-the-counter services like OTCBB or Pink Sheets.

And don’t think that OTC stocks are any more prone to fraud than listed companies are. Stocks listed on services like OTCBB and OTCQX have heightened listing and disclosure requirements over the past decade to help keep things transparent for investors.

5.) There’s No Place for Penny Stocks in My Portfolio

If you think that penny stocks don’t belong in your portfolio, maybe you should take a second glance at what your investment objectives are. While penny stocks have traditionally been riskier choices than their listed counterparts, today’s stock market is bringing that precept into question.

Most portfolios have at least some room for higher-risk/higher-reward investments like penny stocks. That’s especially true if investing in penny stocks doesn’t impinge on your retirement money.

Source: The Top Five Myths About Penny Stocks

The most interesting news item recently was found on the cover of the Financial Times newspaper, where we learn that a guy named Lahde “made tens of millions of dollars from betting against the financial and property sectors during [the] past two years”, and he now wanted to thank “the low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA” who made it all possible for him to find enough suckers.

He noted that “These people who were often truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG (NYSE:AIG), Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the aristocracy,” he says, “only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

This goes along with an article in the St. Petersburg Times about Tom James, chairman and chief executive of Raymond, James Financial, who had “some tough words for the wizards of Washington, D.C. who oversaw the recent $700-billion bailout package”.

He reports that “The Brave And Wonderful Mogambo (BAWM) was right all along! Those government weenies are the biggest freaking morons you ever saw, and we as a country should be ashamed of ourselves for having elected such corrupt, half-witted, utter failures and congenital idiots!”

As you have probably guessed by now, he did not say those exact words, but he implied every syllable when he said, “Legislators were almost embarrassingly ignorant of how the financial system works”, which I figure explains how they don’t understand the linkage between their own Bad, Bad Performance (BBP) as legislators and the subsequent Bad, Bad Performance (BBP) of the economy, and he says that only 3 of 16 legislators that he talked to actually understood what was going on in the “credit crisis.” Less than 20%! Hahaha! We’re doomed!

Well, maybe these Congressional losers will understand the unfolding economic slowdown, as evidenced by the Baltic Dry Index, which is an index of the cost to transport stuff by cargo ship, and which has fallen precipitously, which seems very important to me, and to Junior Mogambo Ranger (JMR) Riccardo, too, who is also alarmed by this like – as I previously said – me.

It’s actually beyond scary, in a terrifying kind of “ain’t nobody buying nothing in a consumer economy” kind of way, which means that without the consumer buying stuff as his or her contribution to the famous statistic of “the consumer is 70% of the economy”, we are, in case you ain’t heard, freaking doomed if the consumer ain’t buying!

Well, maybe not all buying is drying up, as Ted Butler, silver market analyst, reports that in the last 10 months, “some 150 million ounces of silver can easily be documented to have been bought by investors. Undocumented purchases would add tens of millions more ounces.”

In fact, when you add it all up, “Investment demand for silver this year is running at a full 25% of world mine production and over 20% of total production (including recycling). This is a remarkable historical turnabout.”

Thus, it is easy to see why Mr. Butler is “bullish beyond belief for silver”, since this kind of demand means that “In silver, the documented 150 million ounces bought in the first ten months of this year is equal to 15% of all the silver bullion equivalent thought to exist!” Wow!

More than one-seventh of all the silver bullion “thought to exist” in the whole world was suddenly bought up in less than a year, and yet the price of silver has been pounded down to less than 10 bucks an ounce? No wonder I am so bullish on silver!

He also notes that the gold/silver ratio is at more than 80, which is “one of the biggest differences in history.”

And not only that, but since there are 4 to 5 billion ounces of gold in the world versus only 1 billion ounces of silver, that means that “the total dollar value of all the gold in the world is worth 300 to 400 times more than all the silver in the world (80 times 4 or 5)”.

In dollars and cents, the dollar value of all the gold in the world is about $4 trillion, while the value of all the silver in the world is but a laughably low $10 billion! Where do YOU think the most profit potential lies? Me, too! Hey! This investing stuff is easy! Whee!

Source: A Bull in a Silver Shop