Energy wake-up call

Excerpts from OUR ENERGY FUTURE by Jeffrey Carter [via InstaPundit]

At the Chicago Booth Graduate School of Business Management Conference Friday, I listened to a panel discussion on energy. It was interesting, primarily because the two panelists didn’t mince words. They offered up some interesting stats. . .

• Running an oil company isn’t cheap and has a lot of fixed costs.


• Energy prices aren’t going lower in the long run and instead of battery powered cars and trucks we should figure out how to make uranium powered cars and trucks.


• Research into green energy isn’t a total waste of money or time since fossil fuels will eventually be gone. However, government subsidies and government money pouring into research seems ill spent.


• Natural gas is a good alternative, but we need to figure out how to develop an ecosystem so that it becomes easy for companies to switch. Natural gas has more energy density than diesel fuel.


• We don’t need CAFE standards to stimulate car companies to create better cars. Economic incentives create them. There is no secret car that gets 90 MPG that car companies are withholding from the market. If they had it, you could buy it on a lot.


• Give up on high speed rail. It’s not going to be possible under the current political environment, or economic environment.

• The US will squander much of it’s storehouse of current energy due to bad policy.


• Things like the Chevy Volt in the current technological environment are not efficient. They are science experiments.

As an angel investor, I don’t see me making investments in green energy that will take years to come to fruition. However, as an angel investor I can make investments into companies like Power2Switch that are in the energy sector, but not in the research and development of it.

A CERTIFICATE with my NAME ON IT?

On Sychophants, Process Servers & Decoupling
Posted by Ann Barnhardt - December 15, AD 2011 9:38 PM MST

1. Corzine and Abelow testified again before the House Financial Services committee, and it was another nausea-inducing spectacle. Today's questioning was actually WORSE, because Terry Duffy had lobbed the committee a grapefruit on Tuesday regarding Corzine's knowledge of the customer seg funds being raided and sent off to Europe. (OF COURSE HE KNEW. BACK OFFICE TREASURY DATAPUNCH CLERKS DON'T SEND CUSTOMER SEG FUNDS TO EUROPE OR ANYWHERE ELSE OF THEIR OWN VOLITION.) But, of course, none of the congresscritters were even remotely smart enough to ask about any of that. In fact, one chick congresscritter was fawning over Corzine so hard, I honestly thought that she was going to come down off the dais, crawl in Corzine's lap, push back his greasy mullet, and start blowing in his ear. Her line of questioning - if you can call it that - was along the lines of, "Mr. Corzine, is it possible that no one within the company notified you of any problems because you are so brilliant and awesome and thus people find you intimidating?"

2. The best part of the whole day was Corzine getting served with a big ol' lawsuit as he walked out of the hearing room during the break. A commodity trading advisory service who is hung out to dry for into the NINE FIGURES is suing the top 20 or so executives in the company. AWESOME. Here's the video:


3. Finally, a very simplistic explanation of how the cash commodity markets are soon going to decouple from the futures markets. This is a little complex, but stay with me. I think this is important to understand because none of us who have lived our whole lives in the U.S. have ever seen a market disintegrate.

The threat (or promise) of delivery upon expiration is what keeps the futures markets tethered to the cash markets. Up until now, if an unreasonably wide spread between the futures price and the underlying physical commodity market got too out of whack, a process called "arbitrage" would kick in. Arbitrage is when a party simultaneously buys and sells on two separate but related markets in order to capture an inefficient spread between those two markets.

I'm going to use precious metals as my example commodity because there are alot of metals guys reading this, and because the metals markets will be the big tell in term of when decoupling and thus total futures market disintegration is upon us. But these examples apply to all of the physical commodities.

Let's say that the physical silver market is trading far lower than the silver futures price. This is what is called a WEAK BASIS. The BASIS is the relationship between the cash market and the futures market and is very simply defined as (CASH minus FUTURES). If cash silver can be bought at $25.00 per ounce and the futures are at $30.00 per ounce, the cash is $5.00 under the futures. When cash is under the futures, this is called a WEAK basis.

Up until now, what would a metals trader do? In very simple terms, he would buy the cash silver at $25.00 per ounce and then simultaneously sell the futures at $30.00. Because he has short-sold the futures, he could hold the contract to expiry and then deliver the $25.00 cash silver he bought to make good on the contract and receive his $30.00 price. So his simple net profit would be $5.00 per ounce. As many traders saw this spread and simultaneously executed this same strategy of buying the cash and selling the futures, what effect would this have? Right. It would cause the cash-futures spread to move back in toward convergence by pushing the futures price down (lots of sellers) and propping the cash market up (lots of buyers).

Now the opposite scenario: a STRONG basis. Let's say cash silver is trading at $32.00 and the futures are trading at $28.00. A trader might take physical silver that he has in inventory and sell it in the cash market, and then immediately take those proceeds and buy back and equal number of ounces in the futures market and take delivery. Since the same number of ounces in the futures market cost $4.00 per ounce LESS, he would end up with the same number of ounces in his inventory PLUS $4.00 per ounce in CASH in his pocket. If he and many other traders saw this condition and they all sold cash silver and bought the futures, this would, again, converge the spread between the cash market and the futures market.

The lynchpin that is holding this dynamic together and keeping the futures markets tied to the underlying cash market is the fact that the futures contracts are deliverable, and a trader can either deliver or take delivery of actual physical silver via his futures position.

Are we seeing a problem yet? The futures markets have lost their viability and trustworthiness because of the MF collapse and theft. At some point in the not-too-distant future, people everywhere are going to realize that the delivery mechanism is not reliable. Heck, just holding cash and/or positions in a futures account is no longer reliable. The the market itself is not reliable, traders will no longer attempt to arbitrage these basis spreads because the risk to the trader that the rug will be pulled out from underneath them is simply too great.

And in the metals markets, the delivery process itself is . . . um . . . shall we say, easily corrupted? When you "take delivery" of physical metals, it doesn't get sent to your house. All you get is a certificate saying that X number of ounces are being held in a certified vault somewhere with your name on them. After the MF collapse, that sounds like a joke, right? A CERTIFICATE with my NAME ON IT? Yeah. That really is how it works.

When the arbitrageurs finally lose all confidence in the markets, the cash market will decouple from the futures because no one will be willing to take the risk of having their money, positions and/or physical metals stolen/confiscated. If no arbitrageurs are willing to trade these spreads - no matter how wide they may become - and thus there is no force causing the cash and futures to converge, we will see the basis spreads become extremely wide. As people flee the futures markets, the futures prices will drop, while the cash markets hold steady or even diverge and actually rise as all of the former paper players realize that physicals are the only remaining game to be played.

Watch for this. Watch for the gold and silver futures to sell off as people walk away from paper while the online cash dealers, seeing that market demand for their physical inventory is robust, begin to ignore the futures prices and hold their prices steady or even raise them. When you see this basis decoupling and absence of arbitrage, lo, the end is nigh. A parabolic spike is coming.

Warren Pollock Interview & Other Stuff
Posted by Ann Barnhardt - December 14, AD 2011 8:16 PM MST

Just so you all know that I'm not alone in my sentiment and actually am speaking on behalf of other folks and brokers in the industry who simply don't have the soapbox that I have, here is an email from a second-generation floor trader in Chicago:

Ann Barnhardt,

Thank you for speaking up and calling it like it is. My father joined the Chicago Board of Trade in 1979. I joined the CBOT in 2009. We are customers of MF Global. The day they told me my money had been frozen I declared the futures industry completely dead. I grew up in the industry. I knew there were always thieves, mobsters even, in the business and I saw it from day 1 on the trading floor. But the depth of deceit has reached new lows.

MF Global and the CME violated the only principle that mattered in futures and anyone watching the farmers and ranchers testify yesterday should've seen that something has been broken beyond repair for them: TRUST! If the hedgers like you and your customers won't use the market then what are the speculators like me supposed to do? Well, I believe we're seeing it. The big specs have completely captured the trading venue through High Frequency Trading and are using it to fleece as many people as foolishly remain in the game where no bona fide hedgers operate anymore. The inmates not only run the asylum, they've set fire to it.

Like toast?

Under the radar:

Spain is toast. That's the solid opinion of a billionaire global investor I know with whom I met privately in Paris last weekend. The only European countries left standing financially when Spain and thus the EU-Euro enterprise goes under are Germany, Denmark, and Holland - plus non-eurozone countries like Norway and of course Switzerland. There's a chance Italy might barely squeak through, but likely not the UK, and France is broke.

We'll always have Paris, and Europe too - but the EU-Euro game is soon to be over.

Oh - and my billionaire friend (whose $20B private equity fund is averaging 68% returns, so he knows what he's doing) won't touch investing in China with a 20-foot pole...

10 reasons why this 228-point slump in the Dow makes me sit up and take notice

On Thursday, the day before the Japanese earthquake, the Dow Jones Industrial Average saw its biggest drop since August. Markets tumbled while fears surged -- about jobs, Spain and Saudi Arabia.

But what does this mean for you, the investor?

Was this just a one-day wonder, a buying opportunity, a small but passing cloud on an otherwise sunny horizon? Or was it something more ominous?

The Dow's Plunge: Should You Be Worried?

Investors around the world say President Barack Obama is bad for the bottom line

Investor Poll: Obama Bad for Business Despite Profit Surge

Internationally, the fear of a double-dip recession--and a global depression--is palpable...

SOCIETE GENERALE PREDICTS COLLAPSE OF EURO

An Easily Understandable Explanation of Derivative Markets

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics
as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand?

"One of my clients was directly threatened by the White House..."

May 1) - Frank talks with Tom Lauria, bankruptcy attorney at White & Case, who represents a group of lenders that object to the Chrysler sale.

So: the White House "Press Corps" is now being used as a militaristic arm of the White House!

Folks, we're going to be a banana republic if you do not wake up and start fighting back.

The writing on the wall

Read it:

• You can’t borrow as much as he [Obama] will need to without raising interest rates that hurt the economy;

• The massive amount of spending will trigger runaway inflation once the economy starts to recover;

• His overhaul of the tax code (still in the planning phases) and his intervention in corporate management will create such business uncertainty that nobody will invest in anything until they see the lay of the land;

• His bank program is designed to help banks, but not to catalyze consumer lending. And his proposal for securitization of consumer loans won’t work and is just what got us into this situation.

So Mr. Obama should enjoy his poll numbers while he may.

Obama sows seeds of demise

Investing? Protect yourself!

The Wall Street Journal provided this great link (which I've added under ORGANIZATIONS on the lower right panel of this blog):

Financial Industry Regulatory Agency

You can find regulatory records for stockbrokers, investment advisers, insurance agents and their firms online...which states and regulatory organizations that brokers and their firms are registered with, along with the licenses they hold, the exams they've passed, and their employment history.

The site also lists any formal investigations and disciplinary actions initiated by regulators, along with customer disputes, certain criminal charges and financial disclosures, including bankruptcies.

For investment advisers with firms regulated by the Securities and Exchange Commission--usually those managing more than $25 million - Investment Adviser Search.

Taken from: Seven Questions To Ask When Picking A Financial Advisor

‘Obama Bear Market’ Punishes Investors as Dow Slumps (Update2)

March 6 (Bloomberg) -- President Barack Obama now has the distinction of presiding over his own bear market.

The Dow Jones Industrial Average has fallen 20 percent since Inauguration Day, the fastest drop under a newly elected president in at least 90 years, according to data compiled by Bloomberg. The gauge has lost 53 percent from its October 2007 record of 14,164.53, slipping 4.1 percent to 6,594.44 yesterday.

More than $1.6 trillion has been erased from U.S. equities since Jan. 20 as mounting bank losses and rising unemployment convinced investors the recession is getting worse. The president is in danger of breaking a pattern in which the Dow rallied 9.8 percent on average in the 12 months after a Democrat captured the White House, according to data compiled by Bloomberg.

“People thought there would be a brief Obama rally, and that hasn’t happened,” said Uri Landesman, who oversees about $2.5 billion at ING Groep NV’s asset management unit in New York. “It speaks to the carnage that’s in the economy and the lack of confidence in the measures that have been announced.”

A bear market is defined as a decline of 20 percent or more.

IMPORTANT: READ THE WHOLE THING!

Bob Brinker says Hillary Clinton is "all mixed up!"

At approximately 2:10 PM (PT) I was driving home and listening to esteemed financial advisor Bob Brinker when he said something that knocked me for a loop. He said that he was surprised at the almost non-existant coverage of Hillary's statement regarding China and that she was "all mixed up."

WASHINGTON - Many voters, pundits and pollsters think Iraq will be the decisive issue in the 2008 election, but increasingly Democratic presidential contender Sen. Hillary Clinton is focusing on another country: China.

Clinton is making America’s dependence on Chinese investors a central theme of her 2008 message. She took to the CNBC airwaves Thursday to declare that America was undergoing “a slow erosion of our own economic sovereignty.”

Clinton sounds the China alarm as ’08 issue

He went on to explain just WHY she has gotten it all wrong and, if you are thinking of voting for her or know anyone who is, you owe it to yourself, your friends and your family's future to listen to this (it's only $4.95 for a whole thirty days of Mr. Brinker's radio shows):

Download the Show! Introducing MoneyTalk On Demand To Go, a downloadable version of the celebrated Bob Brinker program. Now, you will be able to listen at your convenience on your portable media device whether it's in your car, on the treadmill or just relaxing in your own living room. You won't have to stay online to listen any more!

Wonder just how qualified he is?

Bob Brinker has more than twenty five years of investment management experience. He is the host of the weekend financial talk program MoneyTalk. The program is nationally broadcast live from 4pm to 7pm Eastern time on Saturdays and Sundays. If you would like to call the program, dial (800) 934-2221. Bob answers investment questions from around the country and discusses current issues on the radio program. If you would like to listen to the program, consult your local listings for broadcast times.

In addition to hosting Moneytalk, Bob Brinker publishes Marketimer, his monthly investment newsletter. Marketimer covers stock market timing, federal reserve policy, specific mutual fund recommendations, and model portfolios for various objectives. Model Portfolio I is designed for investors with aggressive growth investment objectives. Model Portfolio II is designed for investors with long-term growth objectives. Model Portfolio III is designed as a balanced portfolio for current investment income along with capital preservation and modest growth.