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Archive for 2010

EU Sues Goldman Over Volcanic Ash Fallout

Courtesy of Benjamin N. Dover III

BRUSSELS—European Commission President Jose Manuel Barroso announced late Sunday that the European Union has filed suit against investment banking giant Goldman Sachs for the fallout of ash from Iceland’s Eyjafjallajökull volcano.  The volcanic ash, which has blanketed the skies over most of Europe for the last four days, has grounded almost all European air traffic, stranding travelers and disrupting economic activity throughout the European Union. 

In a statement delivered in Romansh, the official EU language of the month, Barroso said, “We have uncovered evidence that this so-called ‘natural disaster’, which is costing the EU hundreds of millions of Euros, is in fact an Act of Goldman, and we intend to hold the Zionist-American cabal in charge of the firm accountable.”  “First the profligate Americans drag the world into a near-depression and now they crap all this ash on us.  Who the hell do they think they are?” added Greek Prime Minister George Papandreou from Athens, where he was chairing a conference on Greek sovereign debt entitled, “How American Speculators Forced Us to Cook the Books, Lie to Our European Partners, and Pretend We Don’t Need A Massive Bailout”.  

The EU complaint alleges that Goldman operated a proprietary wind-blowing strategy to direct the volcano’s ash into Europe’s stratosphere.  Goldman is accused of profiting from the fallout by buying complex Flight Cancellation Swaps that are netting Goldman millions of dollars every time another European flight is cancelled.  The complaint cites a smoking gun email from Francois Tubbey, a 16-year old Goldman vice president, to an unidentified woman at “i@&$*edTiger@gmail.com” stating, “That’s right, baby, Fat Franky’s in charge of the weather.”   

Several European banks who are counterparties to the FCS’s are alleged to be suffering billions in losses with no end in sight, apparently because they continue to sell the FCS’s to Goldman.  Reached for comment, the Chairman of Royal Bank of Scotland, one of the counterparty banks, said, “Yes, we know almost all European flights are cancelled, but our advisor is Goldman Sachs, and they keep urging us to sell these FCS’s to them, so we do.  We intend to hold
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Blankfein, Cohn And Viniar Were All Closely Supervising Goldman’s Mortgage Unit Operations

Courtesy of Tyler Durden

One of the most ludicrous claims over the past few days has been that the shady aspect of Goldman’s mortgage unit operations began and ended with Fabrice Tourre, as per the SEC’s complaint. The NYT’s Louise Story has just disclosed the far too obvious: “By early 2007, Goldman’s mortgage unit had become a hive of intense activity. By then, the business had captured the attention of senior management. In addition to Mr. Blankfein, Gary D. Cohn, Goldman’s president, and David A. Viniar, the chief financial officer, visited the mortgage unit frequently, often for hours at a time.” Louise presents a comprehensive analysis of the chronological shift in mood over US real estate among Goldman’s ranks, in which it become obvious that the very heads of Goldman were instrumental in making the critical decision to part ways with Wall Street’s optimistic groupthink, driven primarily by the input of Goldman salesmen who listened to hedge funds and advised the firm’s executives and analysts (coupled with the input of Tourre and Egol) that some of the “smartest” money was turning bearish on real estate as early as 2006.

We also get some insight into the topology of Goldman’s mortgage group:

At the heart of all of this is the mortgage trading unit that, at its peak, employed several hundred people. As recently as 2007, Goldman’s mortgage division was split into 11 subgroups, each with a specialty, according to an internal Goldman document that was provided to The New York Times by a former employee.

Together, these groups stood astride the nation’s real estate market. One group, for instance, handled actual home loans. Another provided mortgage advice. A third syndicated loans among banks. And still another handled commercial real estate.

During the boom, Goldman’s mortgage unit was a leader on Wall Street. In 2006 alone, the bank underwrote $26 billion of collateralized debt obligations, according to Dealogic, a financial data provider. Many C.D.O.’s have since turned out to be bad investments.

Furthermore, we learn that as expected it was Jonathan Egol who is truly the Abacus-man, not his then-28 year old underling:

A few desks away, Mr. Tourre and Mr. Egol were quietly working on the Abacus deals.

They were, former colleagues say, something of an odd couple. A slight man


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No Endives!

Courtesy of Bruce Krasting

I went to my Korean grocer today. The bin where the endives usual sit was empty. I got this wrapper with the nice recipes. My endives come from Brussels. The ones I wanted are probably sitting in an Antwerp warehouse rotting.

We can go a long time without endives. But there are other things that we will need that are not going to get here if the volcano continues to block air traffic from Europe. It’s impossible to predict how an act of god will turn out. I’ll try.

There are only three possible outcomes. Either the eruption continues at its current level, or it could increase in size, or it goes dormant. Two of the three possible outcomes are bad news. Absent anything else, the Base Case has to be that the damn thing continues.

Looking at charts of past performance of a stock or a market really does not provide an answer to what may happen next. But looking in the past is the only guide we have, so we use it. That the volcano blew ash for two full years 190 years ago is of little relevance today, but I will use it. Therefore a conservative Base Case would be for a continuation of the current ash production for at least three-months, alternatively it would belch periodically for several years.

If that were to happen a question to ask is how far will the ash cloud move? Once again there is reason for concern on that. In the northern latitudes the prevailing winds are referred to as the “Westerlies”. These winds are influenced by the Jet Stream. This stream of air circles the globe in an erratic pattern. It ranges from 4 to 7 miles from the surface of the earth. It can be as large as 1,000 miles wide and three miles deep. It moves at speeds up to 300mph.

This first picture shows generally the position of the Westerlies:

The following picture is difficult to read, it shows the jet stream position as of February 2010. Notice that it goes from Europe to Russia, over Asia, the Pacific and right over the US. There are reports that the volcano is spewing ash nine miles into the…
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Euro Plunges, Citi Stopped Out

Courtesy of Tyler Durden

On April 13 we pointed out that Citi put on a long EURUSD recommendation with a 1.349 stop. The cynics in us were confident that this was merely a way for Citi to dump its EUR book.

[Citi] has just issued a long EURUSD call at 1.359. The call by technical analyst Aron Gera, proposes a stop at 1.349. In other words it is now Citi’s turn to offload its EUR book. Gera’s recommendation is based on technical analysis, which, in the form of momentum chasing, is all that seems to work these days. Aron thinks the EUR could surge to an 11-week high, even as the GBPUSD could jump as high as 1.5966 alongside EUR strength.

Mission accomplised. The euro is plunging (last at 1.346, just barely above the 1.345 option barrier) as Shanghai is dropping, Japan is not doing all that well, and half the world is lining up to sue Goldman Sachs. A surging dollar will do nothing to help a market that has just had its first reacquaintance with risk after three months (sorry Bernanke, even endless liquidity is not omnipotent). At least Citi managed to sucker in a couple of its best clients. Will these clients now sue Citi if they found out that Citi was, gasp, shorting the EUR against them?





Investor Sentiment: The Same Story

Courtesy of thetechnicaltake

Yes, it is the same story as the “Dumb Money” indicator remains extremely bullish. And yes, it is the same story as the market has once again enticed increasing number of investors that the “all clear” has been sounded. And yes, it will likely end in the same story as the market will once again serve up the maximum amount of pain for the majority of investors. While the significance of Friday’s high volume reversal has yet to be determined, the set up has the making of a market top – the majority of investors are poorly positioned and the precipitating event (i.e., the government’s charges against Goldman Sachs) was not foreseen. For now, Friday’s price action is just one day and one day does not make a trend. If anything, Friday’s down day breathed some life into the bear case. The market is priced for perfection, and shocks aren’t so well tolerated. From my perspective, this looks like the same old story of fear and greed.


And now this from the Department of Broken Records….


The “Dumb Money” indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2)Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio. The “Dumb Money” indicator is bullish to an extreme degree, and this implies that a price move is either nearing its end or the ascent of prices is surely to show. This is our expectation 85% of the time. As discussed last week, not only is the current value extreme it is also less than prior extremes suggesting decreasing bullishness despite higher equity prices. This remains a noteworthy, yet unconfirmed, negative divergence.

Figure 1. “Dumb Money” Indicator/ weekly
*****

The “Smart Money” indicator is shown in figure 2. The “smart money indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The Smart Money indicator is neutral/ bearish.


Figure 2. “Smart Money” Indicator/ weekly
*****

Figure 3 is a weekly chart of the S&P500 with the InsiderScore ”entire market” value in the lower panel. From the InsiderScore weekly report we get the following: transactional volume decrease as the quarter closed but insiders continue to sell with conviction and buy sporadically.

Figure 3. InsiderScore Entire Market/


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Empty Suits of the Week: ACA

Empty Suits of the Week: ACA

Courtesy of Eric Falkenstein of Falkenblog 

Businessman with graph in dry lake bed beside empty seats

One interesting thing in the Goldman suit is how manager ACA was totally oblivious to Paulson’s intentions. Paulson & Co. were well-known shorts in this space at the time of their deal (first quarter 2007). For ACA to think Paulson was a long investor in this stuff, even if Goldman ever said this (remains in dispute) implies these people were insanely clueless about their industry. What proportion of executives are mindlessly going through the motions, getting paid to show up, and presenting themselves to family and friends as financial gurus in the arcane field of ‘structured finance’. There may not be a law against being clueless, but these are the true frauds in the Goldman/SEC lawsuit.

They suggested they look at ‘credit fundamentals’ (ie, Agency ratings), and then using their 30 professional dedicated to the CDO asset management business (ie, read Agency ratings), ‘utilize proprietary models to stress and confirm the adequacy of cash flows’ (assuming agency rating historical default rates, presumably). 

Anyone working for this bunch of boobs should have a huge black mark. I know that in any large failure, executives all blame someone else, and usually end up unscathed, but this deal highlights they were not doing what they advertized, assessing the collateral’s credit quality. If they did, they would have noted that a high profile short gave them a bunch of credits that had an adverse sample of low FICO, adjustable rate mortgages. They clearly didn’t do the most basic analysis of the portfolio they were managing, nothing.

ACA was a big player, and their business strategy was purportedly to ‘assume, manage and trade credit risk’. Their action on this deal highlights their credit risk assessment appears to have merely been checking the agency ratings. That’s understandable if you are a retail investor, not an institutional investor managing a $1B transaction. ACA probably was rubber stamping its portfolio collateral since inception, a strategy that worked until it didn’t. These are the guys who should be inducted into the ‘Empty Suit Hall of Fame’:

Alan Roseman, CEO
Edward Gilpin, EVP and CFO
James Rothman, Senior MD and Head of Structured Credit
Peter Hill, EVP and Head of Public Finance
Joseph Pimbley, EVP and Head of Institutional Risk Management
Laura Schwartz, Senior MD and Head of CDO…
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DID GOLDMAN OPEN PANDORA’S BOX?

DID GOLDMAN OPEN PANDORA’S BOX?

Courtesy of The Pragmatic Capitalist 

William Black, a former bank regulator discusses the potential implications of the Goldman lawsuit and whether this is the beginning of a witch hunt on Wall Street:


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WHAT DOES THE GOLDMAN FALLOUT MEAN FOR STOCKS?

WHAT DOES THE GOLDMAN FALLOUT MEAN FOR STOCKS?

Courtesy of The Pragmatic Capitalist 

It’s looking like the banks perp walks couldn’t have started at a much worse time for Wall Street.  In mid-January financial reform discussions sparked a swift 10% bank decline, but as reform looked increasingly less likely the banks rallied and they rallied big.  Since the February bottom the banks surged 26%.  It was the largest rally without a 10% decline since last Summer.  How much of that rally was due to lax bank reform could play into the next move for bank stocks and with the way things are looking it wouldn’t be shocking if much of that rally was erased in the coming months.  Banks and the general market have been strenuously overbought for several weeks now, sentiment is wildly bullish and many of the positive catalysts (primarily earnings, an improving economy and lax financial regulation) have been priced into shares.

It was little reported on Friday, but stocks had already turned negative before the Goldman news hit the tape.  Google, Bank of America and GE all reported excellent quarters and all three sold-off on the news.  We saw the same thing occur last quarter when investors were eager to front-run the earnings news, but were disappointed to find out that the news was already priced in by the time the reports were released.  That resulted in the brief 9% decline that laid the foundation for the current move higher.  At this point, a very good earnings season is more than common knowledge and the surge in equities is evidence of that.  Investors are already selling the earnings news so any positive catalyst for equities will likely come from other sources.

Perhaps most alarming with regards to the Goldman news is the level of uncertainty it will create.   At first glance the reaction to the Goldman news looks excessive, but this could have widespread ramifications.  First, this lawsuit looks like a carefully crafted political move that will make financial reform far more stringent than bank investors had been expecting.  President Obama was out Friday saying that he will veto any bill that does not contain derivatives reform.  JP Morgan CEO Jamie Dimon has previously mentioned that this portion of the bill would cost the bank between $500MM – $700MM.  The Goldman lawsuit appears to make derivatives reform a slam dunk.  This would likely shave billions in easy…
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Guest Post: Goldman’s Blueprint For Dumping Toxic Assets: How These CDOs Were Designed To Fail

Courtesy of Tyler Durden

Submitted by David Fiderer

Goldman’s Blueprint for Dumping Toxic Assets: How These CDOs Were Designed to Fail

“Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’”

That claim, from Goldman’s letter to its shareholders, is easily refuted. The S.E.C. has brought fraud charges on one of Goldman deals known as synthetic subprime mezzanine collateralized debt obligations, or CDOs. While most of these deals remain shrouded in secrecy, one of them, Anderson Mezzanine Funding 2007, Ltd. lays out its blueprint in sufficient detail so that we can pinpoint how and why this transaction’s failure was never in doubt.

When the deal closed on March 20, 2007, there was virtual certainty that investors would get wiped out and that Goldman would receive a windfall. And that’s exactly how things turned out. By December 2009, Anderson Mezzanine’s nominal value had shrunk by more than two-thirds, from $307 million to $94 million, though remaining assets’ fair market value was far less. The investment portfolio, which held only two performing assets, had an average credit rating of CC.

Anderson Mezzanine is by no means unique. More than $70 billion worth of toxic assets were dumped into mezzanine CDOs during an eight-month period between September 2006 and April 2007, when it became obvious to Wall Street banks that the lower-rated slices, or tranches, of mortgage-backed bonds were worthless. Other Goldman deals--Hudson Mezzanine Funding I and Hudson Mezzanine Funding II, various Abacus deals--were also designed to insulate the banks from losses on assets it knew to be worthless.

Eventually The Risk of Failure Morphs Into Absolute Certainty

A CDO is like a mutual fund or a hedge fund. It’s an investment portfolio, which, subject to certain limitations, may be actively managed. Sometimes a CDO, including Anderson, also acts like an insurance company. It receives fees for insuring certain identifiable risks, and, whenever called upon to pay out on an insured claim, it will liquidate part of the investment portfolio.

But insurance companies take on risks when the outcome is in doubt. Anderson Mezzanine was more like a life insurance company that insured the lives of 61 patients with Stage IV lung cancer. Whenever a patient died, Goldman, the insured beneficiary for all 61 patients, would collect $5 million. If…
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Swing trading virtual portfolio – week of April 19th, 2010

This post is for live trades and daily comments. 

To learn more about the swing trading virtual portfolio (strategy, membership etc.), please click here

- Optrader





 

Help One Of Our Own PSW Members

"Hello PSW Members –

This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible.  Feel free to contact me directly at jennifersurovy@yahoo.com with any questions.

Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts.  After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.)  Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.

http://www.youcaring.com/medical-fundraiser/help-get-shadowfax-out-from-the-darkness-of-medical-bills-/126743

Thank you for you time!

 
 

All About Trends

Mid-Day Update

Reminder: David is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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Zero Hedge

Living The Grecovery Dream: Two Jobless Parents, Two Kids, One Cat All Living In A Car

Courtesy of ZeroHedge. View original post here.

Submitted by Tyler Durden.

Via KeepTalkingGreece blog,

Squeezed between steering wheel, handbrake, door and dashboard, Katerina reads in her history book, takes notes for school. Next to her, on the driver’s seat, cat Eddy stares right in the camera lens. It may look like a cute snapshot on a sunny day, if it wasn’t for a sad detail: a withering spring stuck in a roll of toilet paper.  A distinctive memory of a former normal life that turned into a grim reality for a family of four.

At night the seat where Katerina sits during the day turns into...



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Phil's Favorites

Chinese Growth Forecasts Crashed to a Paltry 3.9% and are Going Even Lower - One Chart

Chinese Growth Forecasts Crashed to a Paltry 3.9% and are Going Even Lower - One Chart

Courtesy of ZeroHedge

Up until a few years ago, conventional wisdom was that China would grow at nearly double digits as long as the eye could see. Then, however, something happened, and China's 9% growth became 8%, then 7% and even lower, as suddenly the Politburo made it quite clear China would not chase growth at any cost, especially when the cost is trillions in bad debt and other NPLs, as we have explained time and again. The collapse in Chinese growth expectations is shown best on the following formerly hockeysticking chart of IMF's revised Chinese growth projections which has completely collapsed in the past few years.

...



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Chart School

A New Look at the Total Return Roller Coaster

Courtesy of Doug Short.

Note from dshort: I received a recent email on historical total returns that prompted an update to my Roller Coaster Return series. I've updated the charts below based on monthly data through the September close.

Here's an interesting set of charts that will especially resonate with those of us who follow economic and market cycles.

Imagine that five years ago you invested $10,000 in the S&P 500. How much would it be worth today, with dividends reinvested but adjusted for inflation?

The purchasing power of your investment has increased to $19,967 for an annualized real return of 13.91%.


...



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OpTrader

Swing trading portfolio - week of October 20th, 2014

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Insider Scoop

UPDATE: Bank Of America Reiterates On ITT Educational Services As Shares Surge But Risks Remain

Courtesy of Benzinga.

Related ESI Urban Outfitters Drops On Q4 Profit Warning; Mead Johnson Nutrition Shares Spike Higher ITT Educational Services Shares Soar On Preliminary Results

In a report published Monday, Bank of America analyst Sara Gubins reiterated an Underperform rating on ITT Educational Services, Inc. (NYSE: ESI), and raised the price target from $7.00 to $8.00.

In the report, Bank of America noted, “ESI shares rall...



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Market Shadows

Falling Energy Prices: Sober Look takes a Sober Look

Falling Energy Prices: Sober Look takes a Sober Look

What do falling energy prices mean for the US consumer? Sober Look writes a brief yet thorough overview of the consequences of the correction in the price of crude oil. There are good aspects, particularly for the consumer, bad aspects, and out-right ugly possibilities. For more on this subject, read James Hamilton's How will Saudi Arabia respond to lower oil prices?  In previous eras, Saudi Arabia would tighten the supply to help increase prices, but in this "game of chicken," the rules m...



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Stock World Weekly

Stock World Weekly

Newsletter writers are available to chat with Members regarding topics presented in SWW, comments are found below each post.

Here's this week's Stock World Weekly. Just sign in with your PSW user name and password. (Or take a free trial.)

#457319216 / gettyimages.com

 

...

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Sabrient

Sector Detector: Semiconductors get slammed as investors scramble to protect profits

Courtesy of Sabrient Systems and Gradient Analytics

Volatility continues to increase in the stock market and many of the leaders are breaking down. In particular, semiconductors took a rather big hit when one of the bellwethers warned of weakening global demand. Nevertheless, despite the significant headwinds, I do not think this spells the end of the bull market. But the technical damage to the charts is severe, particularly to the small caps, which are in full-blown correction mode. The large caps must show leadership and rally immediately -- or it will put at risk the critical and widely-anticipated year-end rally.

In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up ...



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Option Review

Release Of Fed Minutes, Icahn Tweet Boost Shares In Apple

Shares in Apple (Ticker: AAPL) are near their highs of the session in the final hour of trading on Wednesday, adding to the muted gains seen earlier in the day, following the release of the September FOMC meeting minutes and after activist investor and Apple shareholder Carl Icahn tweeted, “Tmrw we’ll be sending an open letter to @tim_cook. Believe it will be interesting.” Icahn’s tweet hit the ether at 2:33 pm ET and was met with a spike in volume in Apple shares. The stock is currently up 2.0% on the day at $100.75 as of 3:15 pm ET.

Chart – Apple rally accelerate...



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Digital Currencies

Bitcoin Has Been Getting Obliterated

Joe has found a place for Bitcoins, and if you hold a lot of them, you won't like it.

Bitcoin Has Been Getting Obliterated

Courtesy of 

Remember Bitcoin?

There's not much to say about it, except that it's doing TERRIBLY.

Here's a chart going back to earlier this summer. Charts don't get uglier than this.

Bitcoinwisdom

Interestingly, the Bitcoin industry continues to be quite excited about the prospects for the digital currency, and there continue to be announcements about expand...



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Promotions

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Pharmboy

Biotechs & Bubbles

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

Well PSW Subscribers....I am still here, barely.  From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.

First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices.  Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment.  Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer.  For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...



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