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HomeMadoff Victims Call Out FINRA
Posted by Larry Doyle on September 3rd, 2009 8:26 AM |
Is Uncle Sam, in the form of the SEC, attempting to issue a mea culpa, mea culpa, mea maxima culpa in the bungling of the Madoff investigation and trying to conveniently turn the page?
The American public learned very little with the release of the SEC Inspector General David Kotz’s review of the SEC’s failure to expose the Bernard Madoff Ponzi scheme. In fact, having just finished reading the Executive Summary of his investigation, I would maintain it is largely an extended regurgitation of much of what Harry Markopolos provided in his Congressional testimony last February.
What was Harry’s conclusion of his exhaustive pursuit to expose the Madoff scam? The SEC is incompetent.
What was the Inspector General’s conclusion from his investigation? In so many words, Kotz lays out the same results. The SEC was incompetent on so many fronts from the early 1990s until Madoff was exposed last December. For those who would like to read Kotz’s 22-page summary of his investigation, just click on the image below.
Is this all the public gets? Is this all the public can expect from our regulators? Nothing more than a mea maxima culpa? How about a real pursuit of the total truth? This Madoff affair has many more legs. Let’s navigate.
Ronnie Sue Ambrosino, head of the Madoff Victims Coalition for Investor Protection (my guest on NQR’s Sense on Cents with Larry Doyle on August 16th), and her husband Dominic comment on the Inspector General’s report and simultaneously call out FINRA last evening during an interview on Fox Business News.
Ronnie Sue and Dominic effectively connect the dots while highlighting the following:
1. Current head of the SEC Mary Schapiro formerly headed FINRA
2. Harry Markopolos defined FINRA as being “in bed” with the industry when he provided Congressional testimony this past February detailing his decade-long pursuit to expose the Madoff Ponzi scam.
3. FINRA had an internal investment portfolio (Sense on Cents would add that the portfolio was invested in hedge funds, fund of funds, and also had hundreds of millions in Auction-Rate Securities).
4. Amerivet Securities has recently filed a complaint against FINRA. The complaint indicates it has information and reason to believe that FINRA’s investment portfolio invested in Madoff.
Sense on Cents would add that the Amerivet complaint looks to have FINRA provide a full and thorough review of the following:
>> interactions with the major Wall Street banks
>> its compensation practices
>> its liquidation of its auction-rate securities position in 2007
>> all investment activities
Sense on Cents would further add that the Madoff family had extensive relationships with the NASD, Nasdaq (Bernie helped establish this exchange) and FINRA.
Let’s listen to Ronnie Sue and Dominic Ambrosino:
Is the Madoff investigation over? Any rational individual can understand there are many more regulatory questions needing answers. Where do those questions lead us? Inside FINRA and specifically to its investment portfolio. Why shouldn’t a Wall Street self-regulatory organization mandated to protect investors be obligated, and if need be compelled, to provide total transparency of all its business dealings?
I can only hope major media outlets and Washington pick up this story and understand the need to fully investigate FINRA.
I ask you again . . . is the Madoff investigation over? Not by a long shot!
What do you think?
LD
Related Sense on Cents Commentary:
“Amerivet Complaint Against FINRA Alleges Madoff Investment” (August 25, 2009)
NoQuarter Radio’s Sense on Cents with Larry Doyle Interviews Head of Bernard Madoff Victims Coalition (August 16, 2009)
“FINRA Is Supposed to Police the Market” (April 29, 2009)
“Riveting Testimony from a Great American, Harry Markopolos” (February 4, 2009)
LD’s ‘Rules of Trading’
Posted by Larry Doyle on September 2nd, 2009 3:17 PM |
I loved my 15 years worth of trading experience on Wall Street. I thrived on the energy, competitiveness, and discipline critically important to generating long term profitability.
While many media outlets focus on the energy and competitiveness involved in trading, rest assured the real key to successful trading and investing is discipline. In my opinion, this characteristic receives far less focus and attention than it deserves.
I believe discipline is both an intrinsic and acquired trait. In fact, often the real benefits from a disciplined approach are the lessons learned from being undisciplined. Believe me, I learned many of these lessons early on and throughout my career on Wall Street. I accrued plenty of losses in the process.
How did I develop and maintain a disciplined approach during my 23 year Wall Street career? Very simply, I kept a written list of ‘trading rules’ on a piece of paper typically taped to my computer terminal.
High five to AS with whom I developed these rules back in the mid 1980s. These rules not only helped me generate profits, but more importantly kept me from making trading mistakes and thus avert losses.
Let’s review the rules that I applied to trading mortgage-backed securities in the 1980s and 1990s. In many respects, I continue to apply a semblance of these rules today.
LD’s Rules of Trading
1. Market Goes in the Direction Which Hurts the Most People
I would check the stochastics regularly to monitor when the bond market (typically the government bond market) was approaching an overbought or oversold condition. Assessing this measure is decidedly more challenging currently given the presence of Uncle Sam in the marketplace.
2. Never Short a Specified Bond
How often I would see traders short specified bonds without any appreciation for the available float. Initial short sales may appear to be profitable only to turn into nightmares when the trader had to find the bond for delivery to the buyer.
3. Never Set Up for a Trade
This rule specifically addresses a trader’s inclination to establish a trading position based upon color from a client that the client himself planned to enter into the trade. Experience taught me that often the client would find a reason not to execute the trade and now the trader was stuck with the position. (more…)
Uncle Sam’s Continuation of the Housing Bubble
Posted by Larry Doyle on September 2nd, 2009 8:57 AM |
With housing prices down 30+% on average over the last few years, is Uncle Sam blowing fresh air into the housing balloon and actually creating another housing bubble? I believe that’s exactly what is happening.
If you are scratching your head and think I am off base with my assertion, please navigate this path along our economic landscape with me.
What drove the housing bubble? Cheap rates and undisciplined lending from the private sector. What added to the bubble? The internal ‘hedge fund’ portfolios of Freddie Mac and Fannie Mae.
What is perpetuating the housing bubble if not creating another mini-bubble of sorts? Cheap rates and undisciplined lending directly from Uncle Sam or supported by Uncle Sam. What is adding to this bubble? Those same internal portfolios at Freddie and Fannie.
What entities within Uncle Sam’s domain are providing the cheap rates and undisciplined lending?
1. The Federal Housing Administration ( FHA-insured loans are packaged into GNMA securities, which have the explicit backing of Uncle Sam)
2. The Federal Reserve’s quantitative easing program in which it has purchased hundreds of billions in mortgage-backed securities with authority to purchase a total of $1 trillion+ in MBS is also blowing fresh air into the balloon.
3. Freddie and Fannie are also supporting the bubble by providing fresh capital via their portfolios.
People may say that Uncle Sam had to provide this capital because the private sector would not. In fact, The Wall Street Journal makes that very assertion this morning in writing, Industry Seeks Fannie, Freddie Overhaul:
Together with the Federal Housing Administration, Fannie and Freddie now purchase or guarantee nearly nine in 10 new mortgages, since private buyers of such loans have been absent amid the housing bust.
I categorically do not accept this assertion. There is more than enough private capital in the system to purchase these mortgages. The issue is that the private capital will only purchase these mortgages at appropriate risk adjusted prices. Freddie, Fannie, the FHA, and the Federal Reserve are stepping ‘through the market’ and subsidizing mortgage rates by at least 50 basis points and, in turn, crowding out private buyers. The WSJ continues:
Fannie and Freddie have taken nearly $96 billion of capital infusions from the U.S. Treasury since last November. The companies have received nearly 10 times that amount in additional support through purchases of debt and mortgage-backed securities by the Treasury and the Federal Reserve.
![[Picking up the Slack chart]](http://s.wsj.net/public/resources/images/NA-BA159A_FANFR_NS_20090901200812.gif)
Who is benefiting from these subsidized rates? New homeowners. Do not think for a second, however, that risks are properly aligned in this current mortgage dynamic.
The continued mispricing of risk will mean our housing market will experience more protracted levels of delinquencies, defaults, and foreclosures than if mortgage rates were higher and real discipline were instituted into the lending process.
In fact, unless our country accepts a fully socialized mortgage finance system, mortgage rates will have to move higher to reflect private sector pricing. Risks and returns will then be properly aligned and the bubble will deflate.
LD
Related Sense on Cents Commentary:
“Uncle Sam Guaranteeing Sub-Prime Loans” (May 4, 2009)
Give Me a Hard Eight on AIG, Freddie, Fannie, and Citi
Posted by Larry Doyle on September 1st, 2009 3:35 PM |
Want to play craps? How about a little roulette? Black jack? Or should we merely play the slots?
On the topic of casinos and gambling, I hope traders, investors, and the general public fully appreciate the extent to which our wards of the state (AIG, Freddie, Fannie, and Citi) have dominated equity trading volumes over the last few weeks. On many days, these stocks have represented upwards of 25% of the overall volume.
I addressed this point in my August 2009 Market Review and wrote:
A large percentage of market volume has centered on those stocks in which Uncle Sam is heavily involved (Citi, AIG, BofA, Freddie, Fannie). I view these particular stocks as very speculative in nature. That said, there are large short bases in these stocks. The shorts were punished during the month. The stocks did trade off significantly on the last day of the month.
Are we supposed to make assessments of our future economic health and overall market performance based upon stocks in which Uncle Sam holds anywhere from a 40-80% equity stake? I think not. I view trading these stocks as pure gambling, not investing. I challenge any analyst who would say otherwise.
What sector of the market is leading the overall market lower today? Financials!! Which companies in particular? Our friendly Market Data page from The Wall Street Journal highlights the following:
So there you have it, 6 of the top 8 most active stocks being traded today are wards of the state, or a close cousin, that being CIT. Ford is a fully independent entity. Many view General Electric as an extension of the government politically, while the company itself has clearly benefited from government-backed financing.
Don’t take my word for the speculative nature of AIG, Citi, Freddie, and Fannie. The Wall Street Journal highlights the same in writing, Financials Lead Broad Selloff. Specifically the WSJ asserts:
>>Among the weakest was American International Group, which sank 17%. Sanford C. Bernstein & Co. downgraded AIG to underperform from market perform, estimating that if the government’s support and other goodwill were discounted, AIG would have a negative book value of $6.4 billion.
>>Mortgage lenders Fannie Mae and Freddie Mac also traded lower, falling more than 15% after FBR Capital Markets analyst Paul Miller wrote to clients that “[t]here is no fundamental value remaining” in the companies.
I ask you how much money you want to invest on a long term basis in companies which have negative book value or no fundamental value?
The first rule of gambling is ‘only play with money you can afford to lose.’ The same is to be said for money put into these companies which just so happen to be dominating the overall market volume.
Come on, brother, give me a hard eight!!
LD
Buy the Rumor, Sell the News
Posted by Larry Doyle on September 1st, 2009 11:48 AM |
Why does a market seem to improve prior to the actual reporting of positive economic news only to fade when the news is reported? Welcome to the world of trading and investing in which market participants will often ‘buy the rumor’ and ‘sell the news.’
This phenomena is, in fact, the perfect description for today’s price action.
Prior to the market open this morning, equity futures were indicating a slightly weaker opening. In fact, the equity markets did open in slightly positive territory. At 10am, we received economic data which collectively would be viewed in a VERY POSITIVE light. This data includes:
1. Institute of Supply Management Manufacturing Index rose to 52.9 versus last month’s reading of 48.9 and an expectation of 50.5. This month’s reading of above 50 is the first indication of growth in manufacturing in a year and a half. Manufacturing represents approximately 12% of our economy. All other things being equal, this report is an indication that our recession is ending or actually has ended.
In the spirit of full disclosure, the employment component of the ISM Index showed only marginal improvement. This release continues to highlight that an economic recovery will not be robust in terms of improved job prospects and overall employment.
Another somewhat disturbing component of the ISM Index entails Prices Paid. In a big surprise, this release details that Prices Paid rose to a 65 level from 55 last month and against an expectation of 57.8. The increase in prices paid will further pressure profit margins and may be an indication that an increase in inflation is closer than we may think.
Despite, the employment and price components, a return to growth in manufacturing is a critical development in bringing a semblance of stability to our economy.
2. Pending Home Sales also generated a surprisingly strong 3.2% increase versus an expectation of a 1.5% increase. Be mindful, though, that this report had generated a 3.6% increase in July. While analysts will portray this report as a positive development overall, I continue to believe that the housing sector of our economy needs to be viewed primarily through the prism of delinquencies and defaults. Unless and until those statistics start to decline, housing will not be a strong indication of our overall economic health.
3. Construction spending shows little improvement. Against an expectation of a flat reading, the report came in at -.2%. Additionally, the prior month’s report was revised down from a .3% reading to only .1%.
4. Deal activity today is focused on eBay’s sales of its Skype internet phone unit for $2.75 billion. That figure is a very strong valuation for this business.
Despite this generally very positive news, in the last 45 minutes while I have been writing this commentary, the equity markets have had a major selloff and are now down more than 1.5%!! WHY??
Well, let’s be mindful that the economic fundamentals have been totally disconnected from market price action and overall valuations for a protracted period.
Please check my commentary from the August 2009 Market Review in which I wrote:
While it has been foolhardy and painful to fight the Fed and the massive liquidity pumped into the system, I see some real signals in a variety of sectors that this rally is running out of steam. The markets have not truly had a meaningful correction in the last 6 months. Are we due for one? I personally think it would be very beneficial. Why? The disconnect between Wall Street and Main Street has never been greater. I do not view that gap as healthy.
Call me crazy, but I project September will have a 5-7% retraction across the major equity market averages based on reading the tea leaves as highlighted in this review.
What do you think?
One day nor merely a few hours does not a market call make, but I do think the signs we are seeing in the emerging markets and commodity markets are real warning signals that we ignore at our peril.
LD
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August 2009 Market Review
Posted by Larry Doyle on August 31st, 2009 9:28 PM |
August represents the sixth month in a row in which the equity markets have posted positive returns. Has the rally been built upon a solid economic foundation? Does the rally have even further to run? Is it too late to get in? Should investors be more cautious at these levels?
What do the numbers on Wall Street mean for people on Main Street? How are the powers that be in Washington responding to the markets? What do we learn from international and emerging markets?
Let’s review the monthly performance, look beyond the numbers, and project what may lie ahead.
Equities
Unlike the explosive performance in July (equities up 8-10%), the market had a much more subdued performance in August. Be mindful that August is the heaviest vacation month for market participants. Over and above that, total volume in the equity markets has been rather light. A large percentage of market volume has centered on those stocks in which Uncle Sam is heavily involved (Citi, AIG, BofA, Freddie, Fannie). I view these particular stocks as very speculative in nature. That said, there are large short bases in these stocks. The shorts were punished during the month. The stocks did trade off significantly on the last day of the month.
Are we supposed to make assessments of our future economic health and overall market performance based upon stocks in which Uncle Sam holds anywhere from a 40-80% equity stake? I think not. I view trading these stocks as pure gambling, not investing. I challenge any analyst who would say otherwise.
I am concerned about the equity markets going forward. Why? What sector has led the equity markets overall? Emerging markets, specifically China. What is happening in those market segments? China sold off close to 6% on the last day of the month and is down over 20% from its high. That decline is technically termed a ‘bear market.’ Analysts I respect view China’s market as an asset bubble. Emerging markets overall have had an unbelievable run but appear to be losing momentum as both the U.S. markets and developed markets outperformed the emerging markets this month. What drives the emerging markets? Primarily the exporting of commodities. Let’s review that segment.
Commodities
The DJ-UBS Commodity Index is also showing signs of losing momentum. In fact, the index was down -.6% for the month while it is off a full 4-5% from the highs seen in July. While oil is approximately 7% off its highs, natural gas had a significant decline this month (down approximately 30%) and corn also sold off hard early in the month (down approximately 10%) before stabilizing.
The Baltic Dry Index is a good indicator of activity in the commodity space and as a link to activity in the emerging markets, especially China. What does the trend line on the BDI look like? Not very good. The BDI closed today at 2686, down approximately 20% from the highs seen in July.
Interest Rates/Bonds
Ben Bernanke announced in August that the Fed will leave the Fed Funds rate unchanged at a range of 0-.25% for an extended period. There is little doubt that Ben knows there remain major hurdles on the economic landscape. Clearly, both Bernanke and Geithner view improved financial markets and an improved financial industry as a pre-condition to a healthy economic recovery. Against this backdrop, U.S. Treasury debt rallied while other sectors of the bond market added marginally positive returns.
Does it make sense that both equities and bonds would rally in sync? No, but equity and bond markets both continue to trade more on technicals (that is, excess liquidity provided by Big Ben and his friend Uncle Sam) than pure fundamental value.
U.S. Dollar
The U.S. dollar continues to gradually erode in value. Is this any surprise? Many major trading partners of the U.S., from China to Japan to France, are calling for lessened dependence on the greenback as the international reserve currency.
Economy
While the industrial segment of our economy appears to be stabilizing, from my perspective the consumer (remember 70% of our economy is tied to the consumer) remains severely stressed. Delinquencies and defaults continue to run at a record pace across almost every form of debt (mortgages, credit cards).
The next shoe to drop is in the commercial real estate space.
I particularly like Sense on Cents‘ Economic All-Star Bob Rodriguez’s characterization of our economy. Bob views our economic landscape not as a “V,” or a “U”, or a “W” but rather as a caterpillar. What does he mean? He believes the economy will slowly move up and down for the foreseeable future. I concur.
Summary
While it has been foolhardy and painful to fight the Fed and the massive liquidity pumped into the system, I see some real signals in a variety of sectors that this rally is running out of steam. The markets have not truly had a meaningful correction in the last 6 months. Are we due for one? I personally think it would be very beneficial. Why? The disconnect between Wall Street and Main Street has never been greater. I do not view that gap as healthy.
Call me crazy, but I project September will have a 5-7% retraction across the major equity market averages based on reading the tea leaves as highlighted in this review.
What do you think?
LD
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Pinnacle Receives Auction-Rate Securities Settlement; What about Every Other ARS Investor?
Posted by Larry Doyle on August 31st, 2009 12:34 PM |
How can auction-rate securities investors receive liquidity from the remaining $165 BILLION in frozen ARS securities?
Let’s review a recently announced settlement that Pinnacle Airlines negotiated with Citigroup. Bloomberg reported this morning, Pinnacle Airlines Flight From Auction Rate Costs $16 Million. Pinnacle is under severe cash constraints with a $109 million note maturing in early 2010. Bloomberg provides details how Pinnacle received liquidity along with a call option to repurchase the ARS from Citigroup at the same price it is selling the ARS. What does it all mean? Bloomberg highlights:
Pinnacle received $112 million from Citigroup Global Markets Inc. for its $128 million auction-rate portfolio, according to Williams. The $16 million loss amounted to a 12.5 percent discount. The deal allows Pinnacle to buy the securities back at the same discount anytime during the next three years, Williams said.
“We are pleased to have been able to provide a liquidity solution to our client,” said an e-mailed statement from Danielle Romero-Apsilos, a spokeswoman for Citigroup, which sold Pinnacle the auction-rate securities.
Sense on Cents asks the following questions:
1. Would Citigroup offer this settlement to every other investor to which it sold ARS?
2. What do ARS investors who are regular readers of Sense on Cents think of this settlement?
3. Does this settlement preclude investors from participating in a larger settlement that may include penalties?
4. Why shouldn’t other banks, brokers, and money managers who sold and marketed ARS in a fraudulent fashion be mandated by the courts to provide a temporary liquidity facility similar to this? If these entities, which engaged in the fraud, maintain they can not ‘afford’ this settlement, isn’t that a de facto admission of guilt and an ongoing perpetuation of the fraud?
When will ALL investors in auction-rate securities receive an expedited settlement which leads to full and total restitution? The feet dragging on behalf of issuers, banks, regulators, and the courts is a gross injustice of massive proportions.
Perhaps the claim embedded in the Amerivet Securities complaint against FINRA can help to unlock the ARS mess and expose the incestuous relationship between the financial self-regulator and Wall Street. At that point, perhaps ARS investors may move closer to receiving their funds and some justice from this fraud.
LD
United States and Japanese ‘Forests’ Appear as Mirror Images
Posted by Larry Doyle on August 31st, 2009 8:57 AM |
Japan’s election results yesterday, in which the Japanese LDP party was routed, is a clear case of resoundingly ‘throwing the bums out’ in an attempt to ‘clean house’ and set the nation on a new track. What direction is that track headed? East, as in measures of increased protectionism within Japan itself and a closer relationship with the BRIC nations, primarily China.
Sense on Cents provided a hint of this on July 13th in writing, “Will Japan Take a Samurai to the U.S. Dollar?”:
Is the economic influence of the BRIC nations (Brazil, Russia, India, and China) gaining momentum and a huge ally in the assault on the U.S. dollar? It would appear so. What country is also questioning the validity of the greenback as the international reserve currency? Our second largest creditor, that being Japan.
Japan remains mired in a longstanding run of economic stagnation. This stagnation not only encompassed The Lost Decade of the 1990s, but to a large extent continues today. Japan, much like China, has largely been an export based economy dependent on American consumers. With the American consumer now pulling in his purse strings, what does the future hold for Japan? Let’s review the platform of the victorious Democratic Party of Japan (DPJ). The Wall Street Journal provides insightful analysis this morning, The Audacity of Yuai, in detailing the DPJ’s premise and platform, which includes the following:
> Yesterday’s election represents only the second time that the LDP has lost office in 54 years, and Mr. Hatoyama succeeded brilliantly by campaigning on the audacity of ambiguous “change.”
Interesting . . . “change,” sound familiar?
> Like the LDP, the DPJ wants to protect the politically powerful agricultural lobby, reshuffle public handouts, raise taxes in the name of environmentalism, and protect workers and small- and medium-sized businesses from competition. On the campaign trial, Mr. Hatoyama sold these old ideas as a new vision of government focused on yuai, or friendship and love.
Could we categorize these components as ‘the more things change, the more they stay the same?’ Are we experiencing much of this in Washington as well?
> Japan’s public-debt-to-GDP is about 180% and the fiscal deficit is projected to approach 8% by year end. Mr. Hatoyama promises to trim the budget to pay for his 16.8 trillion yen ($177 billion) in spending promises. But that ignores the gaping debt hole that must be serviced eventually.
What other country has a massive debt problem and is going into deeper debt to dig its way out?
> He suggests that China’s rise to economic dominance in Asia is inevitable and that Japan should do more to redistribute the wealth it currently has.
Redistribute? Sound familiar?
> On foreign affairs, Mr. Hatoyama wants the U.S. to remain the main guarantor of Japan’s security, but with fewer troops and bases in Japan. He is strong on human rights but supports international institutions like the United Nations that coddle rogue regimes.
How gracious of them. We get to protect them with a lessened physical presence. Might he also dare to negotiate with certain ‘rogue regimes?’
The simple fact is the Japanese public is fed up with economic stagnation. However, the Japanese may care to review the foundations of that stagnation. Within that foundation is a culture which has never been willing to recognize losses within its banking institutions. That unwillingness to acknowledge losses has left an overhang of bad debt on its economy.
If you see many similarities in the platform of the newly elected DPJ, look beyond the trees and I think you may see a forest in the United States which, in many respects, is the mirror image of that in Japan.
LD
Banks Are Forestalling Rather Than Foreclosing
Posted by Larry Doyle on September 3rd, 2009 12:22 PM |
What happens when a bank forecloses on a home? It has to book a loss. How are banks dealing with the rapidly increasing rates of delinquencies and subsequent foreclosures? They are forestalling the losses by allowing homeowners to remain in the home for a protracted period. Are they doing this out of generosity? Don’t be that naive. The banks are utilizing the ‘hope’ hedge. That is, they ‘hope’ the economy and housing market will rebound so the values of these homes increase and the loss is mitigated.
Over many years of trading and investing, the ‘hope’ hedge is a recipe for further losses. Why? Please refer to my Rule #1 from yesterday’s “LD’s Rules of Trading”: The Market Goes in the Direction Which Hurts the Most People.
Homes that would otherwise be in foreclosure create a massive overhang of supply in the shadow housing inventory. Do banks believe that buyers do not appreciate this? That would be even more naive. The excess supply will keep a lid on home prices and consumer wealth which directly impacts retail sales.
High five to MC for sharing a recent report from American Banker addressing this phenomena. Kate Berry writes Postponing the Day of Reckoning, which I am able to access from Bank Investment Consultant. Ms. Berry shares some very sobering insights:
These perspectives are totally consistent with those of John Lounsbury, my guest this past Sunday on NQR’s Sense on Cents with Larry Doyle. John pointedly detailed that only 10% of homes being sold currently entail ‘willing sellers.’
What are the implications for this forestalling?
>> Continued pressure on housing overall.
>> Continued pressure on bank earnings from these mortgages.
>> Continued underwhelming trends in retail sales by consumers.
>> Prospective home buyers, especially in the higher price ranges, can remain patient.
Regardless of what bank analysts or others may want to say, these forestalled homes are not going away.
LD
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