The companies in the S&P 500 (excluding financial, transportation & utilities) in the US have over $640 billion in cash on hand. Yep. This is a number beyond anything seen in modern times. Why the article I read did not include the financials, transportation & utilities I don’t know (suffice to say there is at least another $250 billion there).
Mind you these companies spent $500 billion in the past 6 quarters (year and a half) buying back their own stock. That is $500 billion spent buying back their stock! Now allot of these stock buy backs simply buy back the options they have awarded to their corporate officers. Their officers have seen this enormous build up of cash. They want to get their hands on it. In fact there should be no surprise the SEC is investigating a widespread practice of illegally backdating stock options to lock in low prices so when executives cash out they make more money.
What is really going on is the people running S&P 500 companies are trying everything possible to “cash out”, literally take the cash out of the companies and put it in their pockets. It is no wonder the top salaries kept rising through the dot com bust, the post 911 recession, and then the print money economy engineered by the Fed after 911. There is so much cash no one knows what to do with it all. Is there any wonder it is sloshing around chasing real estate or long dead in the water commodities like “precious” metals. Sorry but gold and silver stopped being “precious” some time ago, lets say around the time of the proliferation of the microchip.
It is also ironic that all this cash chasing commodities like oil has now had the sickening effect of piling MORE cash in the coffers of the oil companies who now hold over $100 billion in cash. ExonMobile alone has over $32 billion in the bank. Apple set up an asset management firm to manage it’s $6 billion and Dell Computer has over $9 billion sitting in the bank.
Seems many companies do things like buy 30 day rolling CD’s. Now where do you suppose this money goes? Banks get the money and lend it out at higher rates. Who, might you ask is borrowing a bundle these days? The US government is the big hog. How about all those hedge funds leveraging themselves to the hilt? They borrow daily to leverage and settle their accounts. The banks make a ton of money servicing these guys (“these guys” make a ton of money also). Wonder who else could be borrowing this kind of money?
Banks are making up to a quarter of their fat profits stealing it from their account holders in exorbitant fees. Yep, that is stealing. We need a law that regulates what banks can charge in fees. I understand something like this exists in the UK. Fees should be by law a true reflection of the cost incurred by the bank for that transaction. For example, I added a deposit incorrectly by exactly $100 recently. I was charged $9.00 for the bank to “correct” this addition error. $9.00!!! You tell me where the bank incurred $9.00 in costs to correct a $100 addition error on one deposit that had like 4 items on it.
Yes, Americans are being ripped off and they are clueless. Many companies have learned to operate lean and charge high fees. If you are an international company you have a simple formula, produce in the parts of the world where the majority of people live on less than $3.00 per day and sell to the part of the world that spends $3.00 on a cup of dirty sugar water. Now what do you do with all that money?
Friday, May 26, 2006
Wednesday, May 17, 2006
All Hell Breaks Loose
Now for the strategies. Yea, if I am so smart how do translate that into dollars? Mind you that is not "gold" but "dollars", you know the stuff you can "spend".
OK, I shorted oil stocks using XLE back in April at around $58 per share. I was looking to short at $60 but missed my chance. Little did I know my chance would appear about 3 weeks later. Oh well, can't always predict the top. Anyway, I was looking to cover when the oil price dropped 10% from it's $75 peak. Oil did weaken but the stock market was stubborn and continued to drive the oil stock prices higher. Then the stock market rout hit late last week. I covered my short position as oil touched $68 on Friday 12 May. That was early. But oil was staying stubbornly in the $68-$70 range so I figured better cover as the bottom looked near. Then BAM, the market got hammered and as of today the oil stocks have gotten killed, exceeding my expectations for a fall.
So now we are down over 10% from the $60 XLE price, I am buying in again at $54. Lets see what happens.
Currency. I bought FRX at about $122.50 when I saw the dollar falling. FRX rises as the dollar falls against the EURO. I was looking to get out at $130 or so. However today the dollar unexpectedly rose as inflation showed a jump. My guess was inflation would hammer the US by August. Anyway, the fear the Fed will raise rates has caused some profit taking in the dollar. I don't care. The dollar is done and I see $1.35 to the Euro by year end. I am staying put.
Metals. I really missed this one. I went with DBC the Deutsche Bank commodity fund and shorted it at $25 and again at $27. The high was $27 and I hoped to cover around $25 or so before a return to rising commodity prices. My big screw up was DBC covers a larger range of commodities including grains. Grains rose as reports about inflation in grain prices later in the year caused traders to bid up prices ahead of the "real" rise later and this has caused DBC to be stubborn and not move much from its current price of $26.00. I am at a cross roads. Hoping for the market rout to take me to my cover price of $25 so I can ditch this fund and play the actual SLV and GLD (silver & gold) funds directly.
Silver. I hit this one on the head. Shorted SLV at $145 and covered at $133.60. Made a good profit and am sitting on the sidelines. If silver drops to $12.50 I may jump in and go long and look for a bounce back to $15.
Rates. I see 8% on the fed funds rate by Feb of next year. Why? Because the Fed has screwed up. They are clueless. I don't care what anyone says if Bernanke stops raising rates the US is going into an inflation era that will hit hard. This is my thought; Fed pauses, waits 2 meetings to see what is going on since the market got hit and by June has not recovered. Fed is worried about liquidity in the market more than inflation. July, market is recovering but the fall in oil and gas prices allow a moderate inflation number and Bernanke waits again.
Then by September meeting all hell breaks loose on inflation and the Fed goes up 1/2 point. The quick reaction caused the market to do the opposite of what usually happens and rallies. The dollar rallies for a short while. Then the economy tanks. The bite on inflation is large and after the summer the consumer is tapped out. We enter stagflation by the end of the year. However, the dollar continues it's decline anyway as the Government debt, trade deficit and tax cuts start to make the US look like the debtor nation with no way out of it's troubles. Interest rates continue to rachet up to stop inflation and support the dollar. The stock market languishes and by the end of the year we have a loosing market for the DOW and oil remains stubbornly high above $65 per barrel. Continued confiscation of oil company assets in Latin America and strife in the Middle East leave no option.
My solution, bought RRPIX, a mutual fund that rises as the interest rates rise. Already ahead 2.65%. I hate mutual funds. They are a rip off but as the unsophisticated an investor I am, this was one easy way to play out my theory.
Cheers...
OK, I shorted oil stocks using XLE back in April at around $58 per share. I was looking to short at $60 but missed my chance. Little did I know my chance would appear about 3 weeks later. Oh well, can't always predict the top. Anyway, I was looking to cover when the oil price dropped 10% from it's $75 peak. Oil did weaken but the stock market was stubborn and continued to drive the oil stock prices higher. Then the stock market rout hit late last week. I covered my short position as oil touched $68 on Friday 12 May. That was early. But oil was staying stubbornly in the $68-$70 range so I figured better cover as the bottom looked near. Then BAM, the market got hammered and as of today the oil stocks have gotten killed, exceeding my expectations for a fall.
So now we are down over 10% from the $60 XLE price, I am buying in again at $54. Lets see what happens.
Currency. I bought FRX at about $122.50 when I saw the dollar falling. FRX rises as the dollar falls against the EURO. I was looking to get out at $130 or so. However today the dollar unexpectedly rose as inflation showed a jump. My guess was inflation would hammer the US by August. Anyway, the fear the Fed will raise rates has caused some profit taking in the dollar. I don't care. The dollar is done and I see $1.35 to the Euro by year end. I am staying put.
Metals. I really missed this one. I went with DBC the Deutsche Bank commodity fund and shorted it at $25 and again at $27. The high was $27 and I hoped to cover around $25 or so before a return to rising commodity prices. My big screw up was DBC covers a larger range of commodities including grains. Grains rose as reports about inflation in grain prices later in the year caused traders to bid up prices ahead of the "real" rise later and this has caused DBC to be stubborn and not move much from its current price of $26.00. I am at a cross roads. Hoping for the market rout to take me to my cover price of $25 so I can ditch this fund and play the actual SLV and GLD (silver & gold) funds directly.
Silver. I hit this one on the head. Shorted SLV at $145 and covered at $133.60. Made a good profit and am sitting on the sidelines. If silver drops to $12.50 I may jump in and go long and look for a bounce back to $15.
Rates. I see 8% on the fed funds rate by Feb of next year. Why? Because the Fed has screwed up. They are clueless. I don't care what anyone says if Bernanke stops raising rates the US is going into an inflation era that will hit hard. This is my thought; Fed pauses, waits 2 meetings to see what is going on since the market got hit and by June has not recovered. Fed is worried about liquidity in the market more than inflation. July, market is recovering but the fall in oil and gas prices allow a moderate inflation number and Bernanke waits again.
Then by September meeting all hell breaks loose on inflation and the Fed goes up 1/2 point. The quick reaction caused the market to do the opposite of what usually happens and rallies. The dollar rallies for a short while. Then the economy tanks. The bite on inflation is large and after the summer the consumer is tapped out. We enter stagflation by the end of the year. However, the dollar continues it's decline anyway as the Government debt, trade deficit and tax cuts start to make the US look like the debtor nation with no way out of it's troubles. Interest rates continue to rachet up to stop inflation and support the dollar. The stock market languishes and by the end of the year we have a loosing market for the DOW and oil remains stubbornly high above $65 per barrel. Continued confiscation of oil company assets in Latin America and strife in the Middle East leave no option.
My solution, bought RRPIX, a mutual fund that rises as the interest rates rise. Already ahead 2.65%. I hate mutual funds. They are a rip off but as the unsophisticated an investor I am, this was one easy way to play out my theory.
Cheers...
Tuesday, May 16, 2006
Banks Monitor Hedge Funds, The Latest Joke...
I am going to be brief here but follow up more precisely later. During a speech today our US Federal Reserve Chairman, Bernanke and the Bush Administration (whatever that is) suggested an industry with no regulation, national allegiances or any other guideline that drives them but to make as much money as possible "moving paper assets" and has grown from $50 billion in assets to over $1 Trillion in assets in under 6 years should continue to be allowed to function with, well, no regulation.
Mind you, $1 trillion in assets is their "assets". These funds do everything on leverage of anything from 10 to 1 to 100 to 1 ratios. They have the ability to crash a currency, drive up the price of an asset to unrecognizable levels and short a market to squeeze every last dollar out of it. They have a herd mentality and play with very technical products.
Now Bernanke suggests that banks, yes BANKS of all institutions should monitor hedge funds. Need someone remind this idiot that:
It was BANKS that lent much of their unlimited amount of oil dollars (from the last oil spike in the 1970's) to Latin American countries. That same debt had to be restructured in the late 1980's into new debt called "Brady Bonds".
It was BANKS that went on a lending spree in the 1980's to finance a commercial real estate development explosion that collapsed with a bail out of the entire S&L industry, a near collapse of the BANKing industry, government scandals and jail time (all overturned quietly in succeeding years of course) of dozens of "BANKers", a $500 billion (real dollars not including the 30 years of interest the government is still paying on the debt) bail out of the BANKing industry's bad loans later packaged into the "RTC" (Resolution Trust Corp.) who’s property was later sold at auction at fire sale prices.
It was BANKS that lent unscrupulously to Asian nations in the mid 90's to countries like Thailand, Indonesia, Malaysia, Korea and others that created so much development in commercial real estate and "luxury" resorts that the entire system collapsed causing one of the largest currency and economic crises in the 20th century.
It was BANKS that lent to Long Term Capital Management, the hedge fund (yep hedge fund) that had to be bailed out in 1998 with an emergency meeting called by the Fed in New York with 8-10 of the top banks and investment houses in the world where they were given the ultimatum, “raise a couple billion dollars by Monday morning or the entire financial system could unwind”.
It IS BANKS that today provide loans, settlement funds and liquidity to the hedge funds operating today and those BANKS are making BILLIONS on these services and lending and are the last institutions that should be asked to better “manage, regulate, request better information” or whatever other twist you want to put on these responsibilities.
It was 2003 when the SEC conducted a thorough “unofficial” report on the hedge fund industry and concluded that some kind of standards needed to be set up to monitor these institutions if nothing else.
It was George Soros, the international billionaire who proposed after the Asian financial crises that some kind of international body needed to be set up to monitor money flows and advise individual companies when gross imbalances are appearing so they would alter their lending and investing habits to avoid the bubble and burst cycle that is so frequent in the investment community mostly because of the heard mentality of these institutions, ahem, BANKS have in their business practices.
Could someone stand up and tell Bernanke there is AN ELEPHANT IN THE ROOM AND HE HAS NO MORE THAN 2 YEARS BEFORE IT TRAMPLES EVERYONE!!
Enough said for now.
Mind you, $1 trillion in assets is their "assets". These funds do everything on leverage of anything from 10 to 1 to 100 to 1 ratios. They have the ability to crash a currency, drive up the price of an asset to unrecognizable levels and short a market to squeeze every last dollar out of it. They have a herd mentality and play with very technical products.
Now Bernanke suggests that banks, yes BANKS of all institutions should monitor hedge funds. Need someone remind this idiot that:
It was BANKS that lent much of their unlimited amount of oil dollars (from the last oil spike in the 1970's) to Latin American countries. That same debt had to be restructured in the late 1980's into new debt called "Brady Bonds".
It was BANKS that went on a lending spree in the 1980's to finance a commercial real estate development explosion that collapsed with a bail out of the entire S&L industry, a near collapse of the BANKing industry, government scandals and jail time (all overturned quietly in succeeding years of course) of dozens of "BANKers", a $500 billion (real dollars not including the 30 years of interest the government is still paying on the debt) bail out of the BANKing industry's bad loans later packaged into the "RTC" (Resolution Trust Corp.) who’s property was later sold at auction at fire sale prices.
It was BANKS that lent unscrupulously to Asian nations in the mid 90's to countries like Thailand, Indonesia, Malaysia, Korea and others that created so much development in commercial real estate and "luxury" resorts that the entire system collapsed causing one of the largest currency and economic crises in the 20th century.
It was BANKS that lent to Long Term Capital Management, the hedge fund (yep hedge fund) that had to be bailed out in 1998 with an emergency meeting called by the Fed in New York with 8-10 of the top banks and investment houses in the world where they were given the ultimatum, “raise a couple billion dollars by Monday morning or the entire financial system could unwind”.
It IS BANKS that today provide loans, settlement funds and liquidity to the hedge funds operating today and those BANKS are making BILLIONS on these services and lending and are the last institutions that should be asked to better “manage, regulate, request better information” or whatever other twist you want to put on these responsibilities.
It was 2003 when the SEC conducted a thorough “unofficial” report on the hedge fund industry and concluded that some kind of standards needed to be set up to monitor these institutions if nothing else.
It was George Soros, the international billionaire who proposed after the Asian financial crises that some kind of international body needed to be set up to monitor money flows and advise individual companies when gross imbalances are appearing so they would alter their lending and investing habits to avoid the bubble and burst cycle that is so frequent in the investment community mostly because of the heard mentality of these institutions, ahem, BANKS have in their business practices.
Could someone stand up and tell Bernanke there is AN ELEPHANT IN THE ROOM AND HE HAS NO MORE THAN 2 YEARS BEFORE IT TRAMPLES EVERYONE!!
Enough said for now.
Sunday, May 14, 2006
The new SEC Who?
The SEC (American Securities & Exchange Commission) appointed a new man to oversee the $7 Trillion mutual fund industry. This is the kind of fanfare that comes with such an announcement these days:
But investors hoping to learn about Donohue's views directly will have to wait. Donohue through a Merrill spokeswoman declined to be interviewed ahead of his official appointment. The SEC also declined interview requests. And neither the SEC nor Merrill would provide detailed biographical information or a photograph of the new regulator.
That is Andrew "Buddy" Donohue.
I must say how much I love nicknames being used for government officials. But that aside, this kind of announcement is frightening. Why? Well I had a run in with Charles Schwab recently where they forced a short position in my account on the sale of shares in a company that had just split. According to the company prospectus and official documents, until the “new” shares were delivered (Viacom, in the case, was split into Viacom (new) and CBS) the “old” shares were to be considered to represent 50% of each new stock.
Well, I sold my entire holdings of the Old shares before the delivery of the two new shares took place so in effect I sold my rights to both of the new shares. Schwab however, forced the sale to represent only one of the two new shares (the Viacom new shares) causing me to go short those shares while retaining my rights to the 50% of CBS shares.
This short position was not allowed in the type of account I held and when I pointed out their mistake, they refused to reverse the trade or make me whole on the transaction and instead bought back my short position at a loss and told me if I did not like it I could “Write the SEC”.
Now, the SEC is supposed to be there to protect investors & regulate the securities industry. They are a public institution. The Securities Exchange act of 1934 states:
Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:
* require that investors receive financial and other significant information concerning securities being offered for public sale; and
* prohibit deceit, misrepresentations, and other fraud in the sale of securities.
The full text of this Act is available at: http://www.sec.gov/about/laws/sa33.pdf.So
I wrote the SEC. They write Schwab. Schwab tells them they had every right to do what they did. The SEC sends me a letter with Schwab’s statement. Now I have to sue Schwab. The SEC does nothing.
During the 1990’s the SEC did nothing. The only person doing his job with respect to gross violations of the law in the securities industry has been Eliot Spitzer, the New York State Attorney General.
In fact when Mr. Spitzer came to Washington to have some words with our impotent government, the SEC went out of it’s way to bash Spitzer. Why not? He made them look like what they had become, impotent regulators appointed by an impotent government run by potent corporate entities.
The moral of the story: The institution created to “prohibit deceit, misrpresentations, and other fraud in the sale of securities” has found it convenient to withhold information about an appointee who will oversee a division representing over $15 Trillion in assets, $7 Trillion primarily held by individual citizens in their retirement accounts. Go Figure.
But investors hoping to learn about Donohue's views directly will have to wait. Donohue through a Merrill spokeswoman declined to be interviewed ahead of his official appointment. The SEC also declined interview requests. And neither the SEC nor Merrill would provide detailed biographical information or a photograph of the new regulator.
That is Andrew "Buddy" Donohue.
I must say how much I love nicknames being used for government officials. But that aside, this kind of announcement is frightening. Why? Well I had a run in with Charles Schwab recently where they forced a short position in my account on the sale of shares in a company that had just split. According to the company prospectus and official documents, until the “new” shares were delivered (Viacom, in the case, was split into Viacom (new) and CBS) the “old” shares were to be considered to represent 50% of each new stock.
Well, I sold my entire holdings of the Old shares before the delivery of the two new shares took place so in effect I sold my rights to both of the new shares. Schwab however, forced the sale to represent only one of the two new shares (the Viacom new shares) causing me to go short those shares while retaining my rights to the 50% of CBS shares.
This short position was not allowed in the type of account I held and when I pointed out their mistake, they refused to reverse the trade or make me whole on the transaction and instead bought back my short position at a loss and told me if I did not like it I could “Write the SEC”.
Now, the SEC is supposed to be there to protect investors & regulate the securities industry. They are a public institution. The Securities Exchange act of 1934 states:
Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives:
* require that investors receive financial and other significant information concerning securities being offered for public sale; and
* prohibit deceit, misrepresentations, and other fraud in the sale of securities.
The full text of this Act is available at: http://www.sec.gov/about/laws/sa33.pdf.So
I wrote the SEC. They write Schwab. Schwab tells them they had every right to do what they did. The SEC sends me a letter with Schwab’s statement. Now I have to sue Schwab. The SEC does nothing.
During the 1990’s the SEC did nothing. The only person doing his job with respect to gross violations of the law in the securities industry has been Eliot Spitzer, the New York State Attorney General.
In fact when Mr. Spitzer came to Washington to have some words with our impotent government, the SEC went out of it’s way to bash Spitzer. Why not? He made them look like what they had become, impotent regulators appointed by an impotent government run by potent corporate entities.
The moral of the story: The institution created to “prohibit deceit, misrpresentations, and other fraud in the sale of securities” has found it convenient to withhold information about an appointee who will oversee a division representing over $15 Trillion in assets, $7 Trillion primarily held by individual citizens in their retirement accounts. Go Figure.
Wednesday, May 10, 2006
Gotrocks
Those of you that have heard or read me say the current world of "investment products" is a world made for those who create and sell them and not for those who buy them here is a tidbit from no other than Warren Buffett...
From Berkshire Hathaway: http://www.berkshirehathaway.com/letters/2005ltr.pdf
Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.
To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.
But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.
After a while, most of the family members realize that they are not doing so well at this new “beatmy- brother” game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: “Hire a manager – yes, us – and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.
The family’s disappointment grows. Each of its members is now employing professionals. Yet overall, the group’s finances have taken a turn for the worse. The solution? More help, of course.
It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don’t suggest it to them.
The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are
simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”
The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with selfconfidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives.
The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.
And that’s where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses - and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).
A sufficient number of arrangements like this – heads, the Helper takes much
of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of
doing so –may make it more accurate to call the family the Hadrocks. Today, in fact,
the family’s frictional costs of all sorts may well amount to 20% of the earnings
of American business. In other words, the burden of paying Helpers may cause American
equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.
From Berkshire Hathaway: http://www.berkshirehathaway.com/letters/2005ltr.pdf
Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.
To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually. Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.
But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions. The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid. The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.
After a while, most of the family members realize that they are not doing so well at this new “beatmy- brother” game. Enter another set of Helpers. These newcomers explain to each member of the Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: “Hire a manager – yes, us – and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.
The family’s disappointment grows. Each of its members is now employing professionals. Yet overall, the group’s finances have taken a turn for the worse. The solution? More help, of course.
It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers. Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don’t suggest it to them.
The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are
simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”
The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with selfconfidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives.
The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.
And that’s where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses - and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).
A sufficient number of arrangements like this – heads, the Helper takes much
of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of
doing so –may make it more accurate to call the family the Hadrocks. Today, in fact,
the family’s frictional costs of all sorts may well amount to 20% of the earnings
of American business. In other words, the burden of paying Helpers may cause American
equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.
Tuesday, May 09, 2006
Au, The Base Mental Attitude
So we now have $700 per oz. of Gold. No, not OZ as in “The Wizard”, but “oz.” as in the "ounce", one-twelfth of a pound in the Troy system of weights or one-sixteenth of a pound in the avoirdupois weight system.
One ounce of gold is one "Troy" ounce. Now, so you understand just how much weight one Troy ounce of gold is, it is equal to 460 grains (31.103 grams). Yea, grains, as in a grain of wheat. Twelve “Troy” ounces equals one “Troy” pound.
However, for those Neanderthals who still use this stupid system of measurement, you are saying, “No, 16 ounces is a pound.” Well that is 16 “avoir de pois” (avoirdupois) ounces equal a pound. However, your ounce is equal to only 437.5 grains (28.35 grams) so it measures in at .910 Troy ounce. So, one Troy ounce is almost 10% heavier than one avoirdupois ounce.
Not to be confused, this means one avoirdupois pound is quite a bit heavier than one Troy pound.
Why all the fuss? I am trying to avoid a shoot out here!
I can see it now, Joe Schmoe hurries down the bank vault in New York in his pickup truck to pick up the pound of gold he purchased for $8,400.00 ($700 per ounce) thinking to himself “Damn! That idiot sold me a pound of gold for a steal.” The bank hands over 12 ounces of gold. Joe Schmoe completely wigs out! Not only has his “precious metal” dropped dramatically in value the day he went to pick it up, but now they are trying to short him 4 ounces!
His only recourse is to START A SHOOTEN!
This is what I am t-r-y-i-n-g to avoid with my somewhat elaborate description of the measurement issue here.
Now the real story:
Citigroup believes investors held commodity positions worth more than $120 billion April, with $30 billion in oil and $30 billion in gas. Gold came in third place at $13 billion, while the long position in copper stood at $4 billion, according to Investec Securities.
Why is this the “real story”. Because Joe Shmoe thinks he no longer needs to drive his pickup truck to the bank vault to get his gold. He thinks he can buy a fund that buys the gold and hold the paper. He believes it is the same thing. I have not read the fund’s prospectus but I am guessing the owners of the fund shares DO NOT have a claim on the actual gold held by the fund. In reality they hold only a fraction of the gold and float worthless paper contracts which are “designed to track the price of gold”.
“Its (the GLD ETF) objective is not to provide investors with the opportunity to own gold bullion by investing in the shares of an ETF. Rather, GLD is designed to track the price of gold. That objective is no different than what is accomplished by a gold futures contract or any of the dozens of numerous gold derivatives available these days. More to the point, futures and derivatives are sold even if the seller does not own the underlying gold bullion needed to deliver on its obligation. They are in practice fractional reserve systems, which allow liabilities for gold to far exceed the quantity of gold owned by the seller of that liability.
…the London bullion market operates on a 'trust-me' basis. Rather than move gold bars around when they are bought and sold - which is a costly process - the various participants accept the word of their counter-party that the bar they just bought really exists, and that it is safely stored in the counterparty's vault or the vault of another market participant.
… "Because neither the Trustee nor the Custodian oversees or monitors the activities of sub custodians who may hold the Trust's gold, failure by the sub custodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust." To be blunt, these disclosures mean that there is no certainty that the gold supposedly owned by GLD really exists.”
The crux of this rant is simple. The people selling every concocted product under the sun to capitalize on the move in commodities prices are all building a house of cards. Don’t believe the hype!
OK, so you get it? Precious metals are expensive to store or move around and to Joe Schmoe, convert to cash. They also compose of no propriety value. They are metals used in some industrial applications and jewelry. If you want to “invest” it is better that you find companies making products that have propriety value, intellectual value, usefulness value, whatever you like. Stay away from Troy.
Quotes by James Turk
One ounce of gold is one "Troy" ounce. Now, so you understand just how much weight one Troy ounce of gold is, it is equal to 460 grains (31.103 grams). Yea, grains, as in a grain of wheat. Twelve “Troy” ounces equals one “Troy” pound.
However, for those Neanderthals who still use this stupid system of measurement, you are saying, “No, 16 ounces is a pound.” Well that is 16 “avoir de pois” (avoirdupois) ounces equal a pound. However, your ounce is equal to only 437.5 grains (28.35 grams) so it measures in at .910 Troy ounce. So, one Troy ounce is almost 10% heavier than one avoirdupois ounce.
Not to be confused, this means one avoirdupois pound is quite a bit heavier than one Troy pound.
Why all the fuss? I am trying to avoid a shoot out here!
I can see it now, Joe Schmoe hurries down the bank vault in New York in his pickup truck to pick up the pound of gold he purchased for $8,400.00 ($700 per ounce) thinking to himself “Damn! That idiot sold me a pound of gold for a steal.” The bank hands over 12 ounces of gold. Joe Schmoe completely wigs out! Not only has his “precious metal” dropped dramatically in value the day he went to pick it up, but now they are trying to short him 4 ounces!
His only recourse is to START A SHOOTEN!
This is what I am t-r-y-i-n-g to avoid with my somewhat elaborate description of the measurement issue here.
Now the real story:
Citigroup believes investors held commodity positions worth more than $120 billion April, with $30 billion in oil and $30 billion in gas. Gold came in third place at $13 billion, while the long position in copper stood at $4 billion, according to Investec Securities.
Why is this the “real story”. Because Joe Shmoe thinks he no longer needs to drive his pickup truck to the bank vault to get his gold. He thinks he can buy a fund that buys the gold and hold the paper. He believes it is the same thing. I have not read the fund’s prospectus but I am guessing the owners of the fund shares DO NOT have a claim on the actual gold held by the fund. In reality they hold only a fraction of the gold and float worthless paper contracts which are “designed to track the price of gold”.
“Its (the GLD ETF) objective is not to provide investors with the opportunity to own gold bullion by investing in the shares of an ETF. Rather, GLD is designed to track the price of gold. That objective is no different than what is accomplished by a gold futures contract or any of the dozens of numerous gold derivatives available these days. More to the point, futures and derivatives are sold even if the seller does not own the underlying gold bullion needed to deliver on its obligation. They are in practice fractional reserve systems, which allow liabilities for gold to far exceed the quantity of gold owned by the seller of that liability.
…the London bullion market operates on a 'trust-me' basis. Rather than move gold bars around when they are bought and sold - which is a costly process - the various participants accept the word of their counter-party that the bar they just bought really exists, and that it is safely stored in the counterparty's vault or the vault of another market participant.
… "Because neither the Trustee nor the Custodian oversees or monitors the activities of sub custodians who may hold the Trust's gold, failure by the sub custodians to exercise due care in the safekeeping of the Trust's gold could result in a loss to the Trust." To be blunt, these disclosures mean that there is no certainty that the gold supposedly owned by GLD really exists.”
The crux of this rant is simple. The people selling every concocted product under the sun to capitalize on the move in commodities prices are all building a house of cards. Don’t believe the hype!
OK, so you get it? Precious metals are expensive to store or move around and to Joe Schmoe, convert to cash. They also compose of no propriety value. They are metals used in some industrial applications and jewelry. If you want to “invest” it is better that you find companies making products that have propriety value, intellectual value, usefulness value, whatever you like. Stay away from Troy.
Quotes by James Turk
Wednesday, May 03, 2006
Oh that "Private Equity"
Well, well, well nothing like private equity. Anyone who knows me has heard me say, "By 2010 there will be 1/2 a dozen "private equity" groups with revenues exceeding $100 Billion per year. These mega "companies" will flourish without answering to anyone."
The term "private equity" obviously means they are "private" (In the US this means owned by individuals unlike in the UK were "private" means owned by the government.) which means no stockholders. This means unrestrained salaries at the top, whatever "corporate governance" they please, ravish raiding of corporate coffers to pay fat “dividends” to their investors, very high leverage to consummate ever larger buy out deals, fat payoffs when worthless “brand names” are floated back on the markets by the “investment bankers” that will dump these newly re-floated companies on unwitting individual investors and last but NOT least NO SARBANES OXLEY COMPLIANCE... You get the picture.
At the midpoint of its price range, Burger King's underwriters are valuing the company at $2.1 billion. In 2002, a private equity group that includes Texas Pacific Group, Bain Capital Partners and Goldman Sachs Funds, bought Burger King from Diageo PLC for $1.5 billion at a time the burger chain's sales were in a decline.
The company's IPO is expected to price and sell some time in the third week of May; the stock will trade on the New York Stock Exchange under the symbol BKC.
Whether Burger King's performance will line up in the Chipotle or the Morton's camp is open to debate. The company's former chief executive, Greg Brenneman, departed suddenly last month, and received a generous severance package just as the company reported a net loss for its fiscal third quarter.
But there's no denying that the private equity group that purchased Burger King in 2002 has made improvements to the chain, producing eight consecutive quarters of comparable sales growth in the U.S. Those owners will continue to hold 74% of Burger King's stock if all shares are sold in the offering and over-allotment.
Burger King also has a strong brand name, which is sure to drive retail investor interest in the deal, says Sal Morreale, who tracks IPOs for Cantor Fitzgerald LP in Los Angeles.
"It's a brand name, a big brand name. How many of those moms and pops are going to go to their discount broker and say I want to buy this stock?" says Morreale.
The company borrowed $350 million in February to help finance a special cash dividend of $367 million to its private equity owners; it will not pay any dividends to common stockholders once it goes public.
Burger King also paid $33 million to members of senior management after the February financing and the dividend decreased the value of their restricted stock and options. In addition, a $30 million management termination fee was paid in February to the private equity owners.
Burger King plans to use all the proceeds from its IPO to pay down its debt; as of March 31, its total debt was $1.35 billion.
Even if the IPO had taken place in March and some of the debt had been paid off, Burger King would have had a net tangible book deficit of negative $623 million - meaning that investors would receive nothing if the company were liquidated.
- By Lynn Cowan, Dow Jones Newswires; 202-862-3548; lynn.cowan@dowjones.com
(END) Dow Jones Newswires May 03, 2006 11:42 ET (15:42 GMT)
The term "private equity" obviously means they are "private" (In the US this means owned by individuals unlike in the UK were "private" means owned by the government.) which means no stockholders. This means unrestrained salaries at the top, whatever "corporate governance" they please, ravish raiding of corporate coffers to pay fat “dividends” to their investors, very high leverage to consummate ever larger buy out deals, fat payoffs when worthless “brand names” are floated back on the markets by the “investment bankers” that will dump these newly re-floated companies on unwitting individual investors and last but NOT least NO SARBANES OXLEY COMPLIANCE... You get the picture.
I thought I would post this little blurb for you so you can consume all of what I just stated in ONE FLEETING EXAMPLE. Case study, Burger King. Note,
- borrowing $350 million to pay a special cash dividend of $367 million to its “investors”,
- $33 million to “pay off” management,
- another $30 million to “terminate a management contract to the private equity investors”. Like HELLO! Who do you think created the management contract? Pay off again, only this time it is to make the private equity owners richer. Remember, this is just ONE deal we are talking about here.
- Oh don’t forget the bottom where after being floated the stockholders will have negative equity if the company were liquidated after the float. Does this remind you of anything, Refco maybe? Milken leveraged buyout deals of the 80's?
Here we go...
Of DOW JONES NEWSWIRES
Fast food chain Burger King Holdings Inc. plans to sell as much as $480 million of its stock by the middle of this month for $15 to $17 a share, implying a total value for the company of about $2 billion.
At the midpoint of its price range, Burger King's underwriters are valuing the company at $2.1 billion. In 2002, a private equity group that includes Texas Pacific Group, Bain Capital Partners and Goldman Sachs Funds, bought Burger King from Diageo PLC for $1.5 billion at a time the burger chain's sales were in a decline.
The company's IPO is expected to price and sell some time in the third week of May; the stock will trade on the New York Stock Exchange under the symbol BKC.
Whether Burger King's performance will line up in the Chipotle or the Morton's camp is open to debate. The company's former chief executive, Greg Brenneman, departed suddenly last month, and received a generous severance package just as the company reported a net loss for its fiscal third quarter.
But there's no denying that the private equity group that purchased Burger King in 2002 has made improvements to the chain, producing eight consecutive quarters of comparable sales growth in the U.S. Those owners will continue to hold 74% of Burger King's stock if all shares are sold in the offering and over-allotment.
Burger King also has a strong brand name, which is sure to drive retail investor interest in the deal, says Sal Morreale, who tracks IPOs for Cantor Fitzgerald LP in Los Angeles.
"It's a brand name, a big brand name. How many of those moms and pops are going to go to their discount broker and say I want to buy this stock?" says Morreale.
The company borrowed $350 million in February to help finance a special cash dividend of $367 million to its private equity owners; it will not pay any dividends to common stockholders once it goes public.
Burger King also paid $33 million to members of senior management after the February financing and the dividend decreased the value of their restricted stock and options. In addition, a $30 million management termination fee was paid in February to the private equity owners.
Burger King plans to use all the proceeds from its IPO to pay down its debt; as of March 31, its total debt was $1.35 billion.
Even if the IPO had taken place in March and some of the debt had been paid off, Burger King would have had a net tangible book deficit of negative $623 million - meaning that investors would receive nothing if the company were liquidated.
- By Lynn Cowan, Dow Jones Newswires; 202-862-3548; lynn.cowan@dowjones.com
(END) Dow Jones Newswires May 03, 2006 11:42 ET (15:42 GMT)
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