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October 23, 2011
Issue 170  -  9-9-Not!
 
 
As anyone who has read this blog for any significant amount of time will know, I am not a fan of either the Democrats or Republicans.  I see them playing a game where the field has been shifted to give a misleading impression of what is really happening.  The system is being driven and rigged to only allow the two major parties a chance at victory.  This is the reason for the ridiculing of the Tea Party (who I'm not a big fan of either).  Any threat to the two party system must be squashed. 
 
On the Republican side, one of the front runners is former Godfather Pizza CEO, Herman Cain.  One of his main themes is an overhaul of the tax system which he is calling 9-9-9.  The idea is simple, 9% income tax rate, 9% corporate tax rate, and 9% national sales tax.  Now I'm all for simplifying the tax code, and flat any tax is simple.  However, what I don't like is the addition of a new tax.  Once the infratstructure is in place for this tax, do you think it will stay at 9%?  Me either.  This will be like every state sales tax which creeps up higher and higher.  Who can complain about going to 9 1/2%?  It's "only" 1/2% more.  See how that works?  Before you know it, your at 12%, then 15%.  If they want to get rid of the unconstitutional income tax, I'll bite, otherwise, no thanks.
 
The government has become so large and invasive that it's almost unstoppable.  It's like trying to stuff the genie back into the bottle during a hurricane.  Almost impossible.  Here's an example of government "help," that will eventually end in tears:  (Dave from Denver)
 
The monthly retail sales report was released to great media hype, as the "preliminary estimated" retail sales number for September was calculated to be up 1.1% from August and exceeded the Wall Street Einstein consensus estimate.

HOWEVER, and remember, with me "however" always surfaces when I pull up the actual data and take a closer look at it than does that babbling bald moron on CNBC. Here's the report if you would like to peruse the numbers yourself:
  Now for "however:" First, please note that the reported headline number is a "seasonally" adjusted estimate using some fancy computer model, per the footnote to the report. I would love to see how the model calculated that adjustments so we can see if they are even reasonable. But this is a big problem with all Government economic reports.

Let's look at a few of notable data points that the brainless wonders on television are self-flagellating over. Everyone is gushing about retail and auto sales. But if you look at the second table on the above link, you'll note that by far the largest jump in sales came from the gas pump. Has anyone noticed that despite a big drop in the price of oil, the price of gasoline seems to keep crawling higher? I would suggest that a large component of retail sales for September came primarily from gasoline sales. Is that good for the economy? To be sure, it looks like auto sales jumped a bit, and that was confirmed by the recent monthly auto sales report for September which was released at the beginning of October.

"However," it appears to me that the increase in auto sales, especially at GM and Chrysler, are being fueled by the big increase in subprime auto loans:
Wait a minute - didn't we get into the trouble that hit in 2008 because of subprime lending? We know that GMACC, the finance arm of GM, went bust and was taken over by the Obama Government. It was recently reincarnated with Taxpayer money (now called "Ally") and once again jumped heavily into subprime auto lending - this time backed by YOUR money. This is exactly why auto sales at GM and Chrysler appear to be strong. I might also note that, per the good due diligence of zerohedge.com, most of these auto sales end up in being shelved at dealers. Please note that an auto manufacturer books a sale once the car is loaded on a train/truck and leaves the factory lot. The dealer then pays for its purchase using "warehouse or floor" financing provided by...GMAC (You). This is not an attribute of real, organic economic growth.
 
So the government is now promoting subprime auto loans?  Isn't that special?  Geez, you just can't dream up this kind of idiocy.  Of course now that seems to be just the way things are done.  Remember AIG, the monster that needed bailing out?  They seem to be back into crazy mode:
 

AIG Assembles Managers, Distributors at ‘Ultra Luxury’ Resort

 

American International Group Inc. (AIG), the insurer majority owned by the U.S. after a 2008 bailout, is hosting an event at a California facility that advertises “the amenities of an ultra luxury hotel.”

The American General unit assembled about 65 people who distribute its products for a two-and-a-half-day stay this week at the Resort at Pelican Hill in Newport Beach, California, said Larry Mark, a spokesman for AIG’s life insurance division. Nine AIG managers were also sent to the resort to make presentations, Mark said in a e-mail. He declined to say the cost of the event for the insurer.

“It is important for these speakers, as well as the eight field representatives in attendance to spend quality, one-on-one time with our key distribution partners to ensure they understand our offerings,” he said. “It is standard practice in the financial-services industry to hold such business development, leadership meetings.”

AIG resumed such conferences about two years ago, after being rebuked by lawmakers in 2008 for spending $440,000 to send about 100 advisers to the St. Regis resort in Monarch Beach,California. Chief Executive Officer Robert Benmosche is working to expand sales as he seeks private investors to replace government capital.

“We are back to the business of being in business and we’re in the marketplace competing,” said Mark.

Senator Max Baucus, a Democrat from Montana, in October 2008 called AIG’s event that year an “insult to taxpayers.”

Fazio’s Course

Pelican Hill has “Palladian-inspired architecture from Northern Italy,” 204 bungalows, 128 villas, a spa and 36-holes of golf designed by Tom Fazio on a property with views of thePacific Ocean, according to the resort’s website.

A “Garden Double Queen” room is available for $395 per night today and tomorrow, and an “Ocean Four Bedroom Villa”costs $1,150 a night, according to the resort’s online-booking system. Kate Starr, a spokeswoman for Pelican Hill, didn’t immediately return phone calls seeking comment.

AIG was bailed out in 2008 in a rescue that swelled to $182.3 billion. The insurer paid back the balance on a Federal Reserve credit line in January, and the Treasury exchanged its preferred interest for 92 percent of the company’s common stock. That stake was cut to 77 percent in a May share sale.

Wow.  Are we pigeons or what?  Back to normal, I'd say.  These guys have no morals or ethnics and personal integrity is a foreign concept to them.  Then again, companies are doing whatever they want with their earnings.  Here is Dave from Denver explaining the fraud at Bank of America:


- Dave in Denver

Bank of America reported net income of $6.2 billion this morning. As explained in my posts on JPM and Citigroup, the banks are using non-cash, non-economic accounting loopholes that allow them to basically create paper income in order to dress up their earnings reports and make them look good to the majority of investors and analysts who only look at headlines and/or only analyze the useless GAAP income, balance sheet and cash flow statements.

In brief, here's what BAC did: of the $6.2 billion in net income, $4.5 billion was derived from their "fair value adjustment of structured liabilities" and $1.7 billion from the good old debt valuation adjustment. The "fair value adjustment" is the revaluation of those nefarious Level 3 assets and liabilities that we really have no way of determining what they are worth because there are not really any observable markets in them. They are the toxic crap that sunk AIG. Here's the description from a recent BAC 10K:

Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable
and are significant to the overall fair value measurement are classified as Level 3 under the fair value hierarchy established in SFAS 157. The Level 3 financial assets and liabilities include private equity investments, consumer MSRs, ABS, highly structured, complex or long-dated derivative contracts and certain CDOs, for which there is not an active market for identical assets from which to determine fair value or where sufficient, current market information about similar assets to use as observable, corroborated data for all significant inputs into a valuation model is not available. In these cases, the fair values of these Level 3 financial assets and liabilities are determined using pricing models, discounted cash flow methodologies, a net asset value approach for certain structured securities, or similar techniques, for which the determination of fair value requires significant management judgment or estimation.

So this "fair value" technique of "guessing" provided 72% of BAC's reported net income. The DVA of course is the income BAC is permitted to record when BAC's ability to repay its debt obligations declines. Both of those accounting tricks combined created BAC's $6.2 in reported net income. So BAC's entire reported income was the product of bullshit accounting maneuvers. Bonus compensation will be paid to upper management based on bullshit.

The bottom line is that using my "however" adjustments, Bank of America had zero net income. BAC also included a $3.6 billion one-time gain from the sale of China Construction Bank stock, which was used to more than offset a "mark to market" loss on its private equity portfolio. Again, the loss on the latter is completely arbitrary and subjective. If we net out the one-time gain and the private equity write-down, Bank of America actually would have reported a loss.

In other words, netting out all the one-time arbitrary and capricious accounting gimmicks, Bank of America's core operations LOST money.

These accounting rules that enable the banks to report a bunch of fantasy income were put in place after 2008 with the intent to protect these too big to fail banks from the ravages of the marketplace. The people creating and enforcing these rules are the same people who have, do or will benefit from them. The people who pay for the damage these rules hide are the Taxpayers. It's getting really corrupt out there...

 
Yes, let's make up a value of our assets which aren't for sale.  Hmmmmm...I wonder what price they'll pick?  This is like getting unbiased evaluations of jr. from mom.  The problem and difference here is that this is a publically traded company and they are LYING and no one says anything.....    Then again, this is not a unique situation in our ruling class: 
 

GAO Finds Serious Conflicts at the Fed 

WASHINGTON, Oct. 19 - A new audit of the Federal Reserve released today detailed widespread conflicts of interest involving directors of its regional banks.

"The most powerful entity in the United States is riddled with conflicts of interest," Sen. Bernie Sanders (I-Vt.) said after reviewing the Government Accountability Office report. The study required by a Sanders Amendment to last year's Wall Street reform law examined Fed practices never before subjected to such independent, expert scrutiny.

The GAO detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves. "Clearly it is unacceptable for so few people to wield so much unchecked power," Sanders said. "Not only do they run the banks, they run the institutions that regulate the banks."

Sanders said he will work with leading economists to develop legislation to restructure the Fed and bar the banking industry from picking Fed directors. "This is exactly the kind of outrageous behavior by the big banks and Wall Street that is infuriating so many Americans," Sanders said.

The corporate affiliations of Fed directors from such banking and industry giants as General Electric, JP Morgan Chase, and Lehman Brothers pose "reputational risks" to the Federal Reserve System, the report said. Giving the banking industry the power to both elect and serve as Fed directors creates "an appearance of a conflict of interest," the report added.

The 108-page report found that at least 18 specific current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis.

In the dry and understated language of auditors, the report noted that there are no restrictions in Fed rules on directors communicating concerns about their respective banks to the staff of the Federal Reserve. It also said many directors own stock or work directly for banks that are supervised and regulated by the Federal Reserve. The rules, which the Fed has kept secret, let directors tied to banks participate in decisions involving how much interest to charge financial institutions and how much credit to provide healthy banks and institutions in "hazardous" condition. Even when situations arise that run afoul of Fed's conflict rules and waivers are granted, the GAO said the waivers are kept hidden from the public.

The report by the non-partisan research arm of Congress did not name but unambiguously described several individual cases involving Fed directors that created the appearance of a conflict of interest, including:

  • Stephen Friedman In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company giving it access to cheap Fed loans. During the same period, Friedman, chairman of the New York Fed, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed's rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO.
  • Jeffrey Immelt The Federal Reserve Bank of New York consulted with General Electric on the creation of the Commercial Paper Funding Facility. The Fed later provided $16 billion in financing for GE under the emergency lending program while Immelt, GE's CEO, served as a director on the board of the Federal Reserve Bank of New York.
  • Jamie Dimon The CEO of JP Morgan Chase served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed's emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns.At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank.
Gee, I'm shocked that the FED is corrupt.  Ok, I just lied too.  The people running this country are corrupt, plain and simple.  What should be done?  Here is a great explanation from Karl Denninger:
 
 
The Bottom Line On All The Frauds

You want to actually resolve what's facing our nation?

Then you need to do two things, and only two things. One you will like, one you will not. But if you only accomplish half, you accomplished nothing.

  1. Restore the Rule of Law. We're a Constitutional Republic, not a Democracy. In a Democracy the 51% enslaves everyone else. Are you black, hispanic, or some other minority? In a democracy you're a slave. Recognize this or make a huge mistake supporting any such move. A Constitutional Republic is governed by the Rule of Law, which says that nobody gets to infringe your fundamental liberty interests, no matter who they are: Rich, poor, white, black or Martian. Everyone who breaks the law is punished and for like crime one gets a like sentence. If I rob you of $50,000 whether I do it with a gun or briefcase is immaterial. Whether I take it one penny at a time or all at once is immaterial too. In each case I must go to prison for doing it and what I stole must be returned to the maximum extent possible.

  2. Recognize that mathematics does not permit compound growth on a permanent basis. It cannot happen, therefore it will not happen. Any claim that it can or will is a violation of the law as it is an intentional fraud. This means that those who were "promised" pensions predicated on 8% growth were robbed. It means those promised Medicare (with medical care going up at 9% a year in cost) were robbed. It means that the growth of debt at a rate exceeding that of growth in the economy could not possibly be sustained on a permanent basis and every claim based on that was a fraud, including home price appreciation, stock price appreciation and more.

That's it. Recognize both of those two facts above and you've got a way to solve what ails this nation. You have a path forward. You have a path to truth. If you fail to do this you have no path forward. You have no truth. You do not have anything that is sustainable and you are a participant in a ponzi scheme.

When you claim there is a "moral imperative" to provide that which is impossible you're wrong. Not only is there no such imperative demanding that which is impossible is in and of itself immoral as you can only achieve what you seek by robbing someone else.

Wake up America. Our politicians love to divide into left and right because then we don't demand the truth, which is found in just two foundational principles as noted above. Everything else (literally everything else) is a worthless debating tactic as it is not possible to achieve what is being allegedly sought. You can temporarily steal from one person to pay another but when you are dealing with an exponential system even this does not succeed in the long term as eventually the money you seek to acquire from others exceeds the total amount of money available.

There are two - and only two - options available to us as Americans. We can accept these facts or we can continue to play political games and our economy and political system will collapse. This is not conjecture, it is a mathematical certainty.

In short, we must grow up.

This has about as much chance of happening as a bunch of squirrels forming a baseball team and winning the world series, so I'll just prepare for the worst. 
 
There was "good news this week:
 
UPDATE 1-US cracks down on commodity traders; will it stick?

Tue Oct 18, 2011 8:01am EDT

* CFTC set to approve limits for commodity speculators
* Rule nixes class limits, aggregation fought by Wall St
* After years of debate, topic still contentious
* Legal challenge looms as financial industry fights back

By

Christopher Doering and Jonathan Leff

WASHINGTON, Oct 18 (Reuters) - The United States set out on Tuesday with its toughest measures yet to curtail speculation in commodity

markets, likely shifting the focus of a fierce four-year debate from the regulators to the courts.

In a measure decried by Wall Street and trading companies as a misguided political attempt to cap soaring oil and grain prices, the Commodity Futures Trading Commission set out its rule on "position limits" that will cap the number of

futures and swaps contracts that any single speculator can hold.

The final rule, due to be voted on after the commission meets from 9:30 a.m. EDT (1330 GMT), will be a relief to many in the industry as it relents on several key provisions that were heavily criticized, as Reuters reported last month.

That included tough measures on whether separately controlled accounts must be aggregated and whether swaps and futures positions can be offset, so-called "class limits", the CFTC said. It also partly yielded to CME Group (

CME.O) calls for equal treatment of cash and physical contracts.

But giving ground on those details will do little to temper deep frustration over a contentious plan that could force banks such as Morgan Stanley (

MS.N) and industry traders like grains giant Cargill to scale back business, stemming an influx of investor capital. The CFTC estimated the measure would cost the industry about $100 million in the first year.

"The Wild West of exempting traders from any concentration levels whatsoever ends now," Bart Chilton, a CFTC commissioner and a staunch supporter of the limits, told Reuters.

A lawsuit to stop the measure coming into force seems likely, say industry experts and lawyers, one more hurdle for CFTC Chairman Gary Gensler, who is struggling against emboldened Republicans and a hostile Wall Street to put in place the rules required by the Dodd-Frank financial reforms.

After an eight-month battle, the Securities and Exchange Commission in July had its first Dodd-Frank rule overturned when a federal appeals court found the SEC had conducted a flawed analysis to support a rule that would make it easier for shareholders to nominate directors to corporate boards.

The position-limits rule may be challenged on similar grounds -- that the costs outweigh the benefits of a plan that many industry officials say will make markets riskier by driving trade to less-regulated overseas venues.

"We need to be very careful, but I believe we're on very solid legal ground," Chilton told Reuters Insider on Tuesday.

The limits could temper investors who have poured over $300 billion into commodity markets, often via index swaps with banks. Under the new rules, banks will no longer be given an exemption for such speculative swaps, although they will be able to hedge on behalf of corporate customers.

Gensler has worked tirelessly to win support from the commissioners. He is certain to have the backing of Chilton, a long-time advocate of tougher regulations, and likely will face opposition from Republican Jill Sommers. Michael Dunn, who is retiring, will likely be the pivotal vote.

Republican Scott O'Malia came out against the rule, saying the agency "overreached in interpreting its statutory mandate".

He said the CFTC had failed to provide the "empirical evidence" to substantiate the rule -- an argument similar to that put forth by industry officials who say that there no proof of the link between speculators and commodity prices

 
One of the biggest problems in the metal area is the concentration positions in futures.  Goldman Sachs and others hold giant short positions (bets that the metals will fall in price).  These are used to keep the price controlled and occasionally to blast the price lower.  It is highly suspected that this is manipulation.  These rules will lessen the amount of contracts these entities can hold which will limit the influence of them.  However, as is often the case when laws are passed that will "stick it to the man," there is a catch:  (GATA)
 

Its All in the Fine Print: CFTC Ruling Gives Exemptions for Prior Positions Established in Good Faith, Final Position Limits Won't Be Determined for 12 MONTHS!

Before everyone gets too excited over today's

3-2 CFTC vote in favor of position limits in commodities, we need to examine WHEN the shorts will be forced to comply with the new rules, the size of the new position limits implemented, as well as what loopholes might be available to the cartel in order to continue business as usual.
Those who have been skeptical of the CFTC should enjoy this as we examine the fine print of today's CFTC position limits regulations.

Exemptions to be given for prior positions without describing how or who qualifies for exemptions: Check.
No defined date for required compliance to short positions: Check. (60 days from the time the term "swap" is defined)
No defined position limits to allow easy identification of whether an entity is in excess of said limits: and Check
Non-spot month position limits will be implemented AFTER ONE YEAR OF OPEN INTEREST DATA!?! Nice work guys!

So what are your thoughts Blythe, sure not as bad as that could have gone, huh?

 So it seems this "fix" has a delay and more than likely, a get out of jail free card is involved.  Surprised?  Didn't think so.
 
There is good news in the metals.  Here is a chart of Central Banks holdings versus the price of gold:j
 
 
Hmmmmmm...that's interesting.  The price of gold has risen AFTER they purchased.  Think that's planned?  You bet it is.  Follow the leaders here and get your gold and silver.  Physical first, then stocks.  MAKE SURE YOU HAVE PHYSICAL METAL AT LEAST EQUAL TO 5% of your total portfolio value!
 
Positions
GORO (closed $19.97, down $.87, average price paid $6)
 
More tedious short selling.  Someone is sitting on this.  Not sure why, but I wouldn't be surprised to see more "news" released that has a negative spin.  This too shall pass.
Mexus Gold (closed $.13, down $.01, average price paid, $.22)
 
There is a private funding of this stock at 12 cents which is causing the price to sink to that point.  We shouldn't see the price drop below 12.  Until the buyers into the private placement are through turning their shares over, we will be under pressure.  Frustrating, but there is nothing we can do about it except keep the faith they can execute their plans.
Alexco Resource Corporation - AXU (closed $7.04, down $.35, recommended at $7.90)
Stocks (Current status, short, short initiated October 15)
Still think the market is headed lower although I have reduced my short position.
Physical Gold (Closed $1642, down $37, average price paid $395)
Physical Silver (Closed $31.40, down $.76, average price paid $5.31
 
I'm closing this week with a video that is about as far from politically correct as you can get.  This is a commericial from a local business in California and lets just say that he tries to offend everyone.  Have a great week!