Geldpress

Ever wonder why the spokespeople for the National Association of Realtors behave like cheerleaders?  CNNMoney just published an interview with David Lereah, who was the former chief economist for the NAR.  In the interview, David essentially admits that he ignored reality and just conformed to the eternal optimist view just to sell overpriced real estate to unsuspecting clients.

I worked for an association promoting housing, and it was my job to represent their interests. If you look at my actual forecasts, the numbers were right in line with most forecasts.

David now works as a private consultant and his interests now lie (pun intended!)  in telling the truth.  And as for his views on the future of real estate, here is what he said:

My views are quite different now. I’m pretty bearish and have been for the past year and a half. Home prices will continue to drop. I think we’ll see a very modest recovery in sales activity in 2009. But we’ve still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more.

Consumers beware!  Do not blindly trust numbers and forecasts from anyone or any organization who has a vested interest in their predictions!

Jim Cramer from CNBC is another example of an eternal optimist serving the interests of his employer.  CNBC is owned by General Electric (GE), and the board of GE will not tolerate anything less than a BUY, BUY, BUY cheerleader on the nightly Mad Money show.  MAS summed up Cramer’s continual and repeated market bottom calls here.

So who can you trust? - In the words of Johann Wolfgang von Goethe (1749-1832), “As soon as you trust yourself, you will know how to live.”  The entire financial system has put on display its widescale incompetence and corruption.  It’s time to take your financial matters back into your own hands.   Read some unbiased books and take some financial classes if you need to.  But for the love of <insert favorite diety here>, stop listening to Jim Cramer and the National Association of Realtors!

There’s no shortage of Apple news lately.  The annual Macworld show starts tomorrow, but this one will be without Steve Jobs.  The news of his planned absence set off wicked speculation on his health.  Today, amidst heavy pressure, he issued a statement on his health directly on the Apple website:

For the first time in a decade, I’m getting to spend the holiday season with my family, rather than intensely preparing for a Macworld keynote.

Unfortunately, my decision to have Phil deliver the Macworld keynote set off another flurry of rumors about my health, with some even publishing stories of me on my deathbed

I’ve decided to share something very personal with the Apple community so that we can all relax and enjoy the show tomorrow.

As many of you know, I have been losing weight throughout 2008. The reason has been a mystery to me and my doctors. A few weeks ago, I decided that getting to the root cause of this and reversing it needed to become my #1 priority.

Fortunately, after further testing, my doctors think they have found the cause—a hormone imbalance that has been “robbing” me of the proteins my body needs to be healthy. Sophisticated blood tests have confirmed this diagnosis…

Apple earnings come out later this month and there is bound to be increased volatility in the shares of Apple between now and then.  Apple closed today’s session at $94.58, rebounding from the $85 level in just 2 trading days.  If Apple is going to test the $80 support level, it will need a negative catalyst to do so - either disappointment in Macworld that starts tomorrow, or in the earnings report shortly after.

I’m staying away from the Apple trade, but if I had to pick a direction, it would be down.  Apple is a great company, and has zero debt.  But the valuation is still to high in my opinion, especially in light of very high expectations, and debt ridden, tapped out consumers.

For those that can’t wait until Macworld, here’s a funny video on the latest rumored (sarcasm) Macbook wheel.

Call me insensitive, but I have a hard time empathizing with the alleged “victims” of the Madoff investment ponzi scheme scandal.  This is not to say that I’m not disgusted by Madoff and the lack of SEC oversight that allowed his crimes to go on for so long.  I’m just tired of reading, listening and watching news coverage that refers to his client list as “victims”.  On the contrary, I classify this as a case of “They came, they gambled, and they lost“.  There was fraud, so I’ll support their rights to a day in court, and the right to sue Madoff, but nothing more.

Clusterstock provides a good summary of the Madoff victims client list here.  Let’s look at a few from Clusterstock’s list:

• HSBC - has exposure of $1 billion.  But according to the HSBC website, “HSBC North America Holdings Inc. is one of the top 10 financial services organizations in the United States“.  That hardly qualifies them as a “victim”.  I can understand how government officials at the SEC were asleep at the wheel, but a private financial instituion of that caliber and size should have known better! And if they claim otherwise, then I would advise every HSBC customer in America to withdraw their funds and close their HSBC account immediately.
• Other financial firms - Access International ($1.4 billion), Fortis Bank ($1.4 million), Fairfield Greenwich corp ($7.3 billion), and others.  Ditto my HSBC comments - should have known better, and if not, close up shop immediately because you don’t deserve to serve your customers!
• Maxam Capital Management LLC - Sandra Manzke, Maxam’s founder, said she is wiped out and her “fund of hedge funds” will have to close as a result of the Madoff losses.  Are you F#*&$#@ing kidding me, Sandra??? You really have a hedge fund where you charge customers enormous fees for your investing and trading expertise, and then you simply take their money and dump it into a Madoff fund?!?!?!  And let me guess, you simply couldn’t be bothered to ask any questions as to why Madoff’s fund had consistent outsized returns and near zero volatility?!?!?!
• Ira Roth family - $1 million in potential Madoff losses.   I’m a bit more sympathetic to them than HSBC, but on the other hand, if the case of Enron didn’t teach you the lesson on diversification, then I’m afraid nothing will! Well if Bernie doesn’t pay up, be thankful that the taxpayers are now on the hook for a portion of your losses.  That’s right, the Securities Investor Protection Corporation (SIPC), will likely compensate all Madoff victims gamblers clients for up to  $500,000 of their losses.
• Richard Spring - this Boca Raton resident, *AND* former securities analyst claimed to lose 95% of his networth, or $11 million in the Madoff scandal, stating “That’s how much I believed in him”.  Let me guess Richard, you were a securities analyst for the SEC?!?!?!  To paraphrase my response to Sandra from above, Are you F#*&$#@ing kidding me, Richard???
• Elie Wiesel’s Foundation For Humanity - Let me be frank, it’s a well known and reputable organization.  But I maintain my minimal sympathy view for them as well. Charitable organizations operate by taking in donations, and then putting those donations to good use.  When there is more cash on hand than they can efficiently put to use, then they need to temporarily safeguard that cash.  Instead, they chose to gamble that cash away on Madoff’s promise of “risk free *AND* outsized returns”.   According to a statement from their website, they lost $15.2 million from the Madoff scandal, representing “substantially all” of the foundations assets.  Hopefully they have learned their lesson, and will diversify their next horde of unused cash.  That next horde of cash may be the taxpayer funded $500,000 SIPC reimbursement.

Summary - Diversify, diversify, and diversify!  Diversify your investments, your investment classes, and most importantly your investment financial instituions!

Sorry for your losses…

Direct from the Charles Schwab website,

The Schwab YieldPlus Fund® is designed with your income needs in mind. The fund’s objective is to seek high current income with minimal changes in share price.

I have personally owned the Schwab Yield Plus fund many, many years ago - when I had more faith in financial institutions.  The Schwab representative at the time persuaded me to buy the yield plus   fund because it was safe, and it would return slightly better than the money market fund for any residual cash.  Luckily, I closed my Schwab account and the Yield Plus garbage that was part of it years ahead of the financial crisis of 2008.

How is the Schwab Yield “Plus” doing today?  Take a look for yourself.

The Schwab Yield Plus did so well this year (sarcasm!) that there is now a class action lawsuit against Schwab.  From the link,

Specifically, the complaint claims Charles Schwab Corporation headquartered in San Francisco, CA, the funds’ underwriter, investment advisers and officers and directors issued untrue statements regarding the lack of diversification of these funds and the extent of investments assigned to sub-prime mortgage backed and related securities.

The investors in yield plus were not complaining due to losses alone, but due to the misrepresentation regarding the fund holdings.  Apparently Schwab also agreed, because according to this link, they did offer small settlement payouts to the fund holders.

Warning to investors - be careful of any bond fund offering both safety and “extra” income!  That combination does not exist.

Related articles:

• Fidelity “Government Bond” funds - Not all “government bond” funds are created equal

The line of incompetent CEO beggers is getting longer by the day.  The Wall Street Journal reported this morning that big commercial developers are now banging on the government’s door, waiting for new taxpayer funded bailouts of their ailing industry.  The developers are naturally blaming the credit crisis instead of their own greed, short sighted thinking, and overbuilding of underrented and unsold properties.

They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

…As part of their begging lobbying efforts, some industry representatives have asked lawmakers to explore the idea of setting up a separate program aimed at boosting lending to commercial real estate only….Among those who have been active in the begging lobbying effort:  William Rudin, whose family is a large Manhattan office-building owner, Stephen Ross, chief executive of The Related Cos Cos., a major U.S. developer, and Steven Roth, chief executive of office and retail landlord Vornado Realty Trust.

Surprisingly, the Wall Street Journal left out several key people and groups that are sweating bullets from their own commercial property refinancing difficulties.  Take the MGM Mirage suite of casino hotels, and now a major overbuilder of unsold and overpriced condos in Las Vegas.  The online casino sphere publication recently stated “MGM Mirage was singled out as a company in jeopardy. Even though it recently sold off a major asset in the Treasure Island Casino, refinancing of current debt may swallow its new liquidity whole.”

MGM may not have been explicitly listed in the Wall Street Journal article, but you can be sure that they will quickly sign their name to any new bailout begging attempts.

With Christmas even just four days away, Santa Clause is the latest CEO to come begging to congress for taxpayer funded bailouts.  Excerpt below, or read the entire article here:

WASHINGTON - Flanked by officials from the United Elf Toytinkerers union, SantaCorp CEO Kris Kringle today told the House Ways and Means Committee that without immediate government financial help, his firm would be forced to declare bankruptcy, lay off thousands of elves and reindeer, and potentially cancel its annual worldwide Christmas Eve toy delivery.

…A full House vote on the SantaCorp is scheduled Friday morning, where it is expected to pass by a comfortable margin. President Bush has pledged to sign any and all bailout request from Congress until the end of his term, “no queshnions ast.”

The New York Times has an excellent article on how fraudulent financial institution profits yielded real bonuses for executives and staff.  Bonuses were paid out based on faked valuations and appreciations in asset prices.  And the bonuses were paid out prior to reclassifying asset values to their real values, and prior to Wall Street firms begging for and receiving taxpayer funded bailouts.

In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.  But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.  Unlike the earnings, however, the bonuses have not been reversed..

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning…

…Traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought.  “What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group.

During the summer of 2008, consumer gas price hedging was a popular topic.  Consumers fed up with high gas costs could “hedge” their fuel purchases.  Hedging is essentially a glorified way of saying gambling, and many consumers who locked in those high prices are now realizing the losses from that gamble.  Mymoneyblog wrote a good summary about how to hedge against rising gas and oil prices earlier this year.  A gallon of gas was selling for $3.70 per gallon at the time.  The article mentioned three possibilities to hedge against even higher prices, including FuelBank, buying shares in an oil ETF (like USO), or buying futures directly on the oil commodity.

Many consumers did use Fuelbank or other services to lock in what are now much higher prices, and essentially losing the fuel price hedging gamble.  Unfortunately, a select few of those gas gamblers complained and demanded reimbursement for their gambles gone wrong.  Also in the summer of high prices, Chrysler created their new ad campaign to allow new car buyers to lock in $2.99 fuel. Anyone who bought a car based off the $2.99 per gallon promise have also lost money on the deal, and they need to take responsibility for their losses.

But fuel hedging did not start with consumers.  Corporations that wanted a more steady income stream would hedge their commodity purchases to even out the swings.  But over the long run, most corporations that hedge only do so as a means to even out the short term results.  Over the long run, an unhedged position will generally lose out over a hedged position.  Take the case of Southwest Airlines.  Jim Cramer praised Southwest as the only airline worth investing in because of their “foresight” into hedging fuel costs early.  Southwest had locked in those low fuel prices early and the later result was peace of mind at a time when United and American were drowning in jet fuel expenses.  But that peace of mind was only temporary as it watched oil tumble from the near $150 level down to the $40 level in just a few short months.  Businessweek wrote an excellent piece Southwest Sees Fuel Hedges’ Pesky Side.

The bottom line is that hedging can and does work to even out volatility, but at it’s heart, hedging is still a gamble.  Both corporations and consumers must realize the risks to the hedging gamble and roll with the punches that the market will inevitably deliver.

Other related articles:

• Portfolio protection - hedging todays roller coaster market ride
• Balanced and hedged portfolio using proshares
• Time for cover - the covered call
• Covered calls - removing the covers and going naked

As expected, Goldman Sachs reported today that it lost $2.12 billion in its latest quarter, averaging out to $4.97 per common share.  The full report can be viewed here, but a shamefully hilarious excerpt follows, along with [Geldpress comments]:

Goldman Sachs reported fourth quarter negative net revenues of $1.58 billion and a net loss of $2.12 billion.  The diluted loss per common share was $4.97 compared with diluted earnings per common share of $7.01 for the fourth quarter of 2007 and $1.81 for the third quarter of 2008.

[Geldpress:  With statements like these, Goldman Sachs continues to insist that they "earned" money in 2007, and that their financial woes only just recently started.  In reality, their executives walked away in 2007 with tens of billions of dollars in faked earnings, and then begged U.S. taxpayers to compensate them for the real losses]

The Goldman Sachs fourth quarter revenue results can be broken down as follows:

• Investment Banking - Consists of investment banking, financial advisory [Goldman advice to clients - Drive your company and the economy into the ground and then beg taxpayers for a bailout], and underwriting.  Revenues in these three components were all down significantly for the quarter - 20%, 54% and 37% respectively.
• Trading and Principal Investments - Negative net revenue of $4.36 billion.  With results like this, it’s no wonder their financial advisory business was down 54%.  Perhaps Goldman Sachs needs to learn that trading is not a sustainable business, but rather a market sum game.   According to Bart Stupak, Goldman Sachs made its money in trading only through heavy manipulation.  Now that they are under increased scrutiny, it will be to difficult for them to make any money from market manipulation pumping and dumping shares trading activities in the future.
• Asset Management and security services - revenues were 19% lower in the quarter for asset management and surprisingly 19% highre for securities services.

With results like this, I would hardly call the gang at Goldman Sachs geniuses.  Just like every other short sighted real estate and financial services company, they cracked under the pressure to increase earnings.  They embraced financial engineering to the extreme and managed to look really good on paper for a few short years.  But the facade has come crumbling down, and Goldman Sachs is left scratching their heads, and completely confused as to what their business model for making money should even be in the future.  In the meantime, their greedy little hands are outstretched and pointing upward, willingly taking in every last cent they can squeeze from hardworking taxpayers.

*Warning: Don’t be fooled into embracing Goldman Sachs just because Warren Buffett is aggressively buying shares.  Remember, he is also buying shares of Moody’s.  Warren Buffett is brilliant, but even brilliant people make foolish gambles.  It turns out that Warren Buffett is making at least two.

Disclosure: The author does not currently own GS or MCO but may trade their shares in the future, but just for fun.

Other interesting reads:

• Why does Warren Buffett like Moody’s?
• Warren Buffett And Derivatives

Check out the New York Times article, entitled “Investors buy U.S. debt at Zero Yield“. The rampant fear in the market and flight to safety is pushing demand for U.S. treasuries so high, that yields have approached zero.  And for brief moments the yields even dipped into the negative territory!  At negative yields, you are essentially paying the government to “preserve” your cash.  And at negative yields, now may finally be the time to stuff some of your cash under the mattress, where you will at least preserve your capital.

In the market equivalent of shoveling cash under the mattress, hordes of buyers were so eager on Tuesday to park money in the world’s safest investment, United States government debt, that they agreed to accept a zero percent rate of return…Demand was so great even for no return that the government could have sold four times as much…In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill.

The bright side of this news, of course, is that incoming president Obama will likely no longer be dependent on the Chineese for funding new and rolling over our existing government debt obligations.  There are enough suckers right here at home to obviate the need for Chineese debt investors.