Monthly Archives: August 2008

Manipulation In the Financial Markets

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In July and August, the USD has actually become stronger against most other currencies, on apparently no news. Gold had also dropped as low as $790/oz from a high of $1030/oz this year, even though there is a shortage of physical gold in the US and the US mint had stopped selling gold coins like the American Gold Eagles. I was wondering if there was some manipulation going on in these markets.

Hedge fund manager John Lee thinks that gold prices are being manipulated in an effort to keep up the dollar afloat.

According to an article on Forbes, the central banks of the US, Europe and Japan planned in mid-March to prop up the US Dollar if it continued to slide.

Officials from the U.S. Treasury Department, Japan’s Finance Ministry and the European Central Bank reportedly drew up a currency contingency plan over the weekend of March 15-16.

The officials did not specify an exchange rate for initiating the dollar rescue plan, but in the event of a free-fall they agreed to aggressively buy the greenback and sell yen and euros.

Japan was to supply yen necessary for the underlying currency swaps. The plan also called for using a previously established swap mechanism between the United States and Europe.

Analysts said even though a rescue never took place, the fact that global monetary officials had agreed on action would be important in the future if the dollar were to tumble again or other exchange rates move very sharply.

Hmmm…who are these analysts and why should we trust what they say?

The Government and Wall Street has been less than forthright in the past. The CEO’s of Fannie Mae and Freddie Mac said a few months ago that they’re in no danger, but Buffett just declared game over for those two.

I’m getting tired of the bankers and government interfering in the natural course of things. They’re bailing out some market participants to the detriment of the taxpayer. People aren’t facing any adverse effects for taking on insane amounts of risks. If it pans out, they give themselves a bonus. If not the US taxpayer bails them out! Effectively, they’re socializing losses while privatizing profits.

Fannie Mae’s CEO claims that they make housing affordable for millions of Americans. However, if they went bankrupt, there would not be money available for huge home loans and home prices would fall. THAT would make home prices more affordable. Yes, it would be difficult for people to get a mortgage to buy a home, but it would encourage regular saving and it would take longer for people to buy their first home. But in the long run, housing would be a lot cheaper with lower payments towards mortgage interest and thus lower effective home costs.

The fact that the two CEOs of Fannie Mae and Freddie Mac took home $32 million last year while saddling the US Taxpayers with $500 Billion in losses means they can’t be trusted. If this isn’t outright theft, then at least it’s either gross misrepresentation, negligence or stupidity and they ought to refund their salaries, if not do serious jail time.

And talking about government manipulation, the Pakistani Government just introduced price controls on the most popular Karachi Stock Exchange Index. They got tired of watching the stock market drift lower every day, so until the officials decide otherwise, the KSE-100 cannot go below yesterday’s two-year low of 9,144!

Why Jim Rogers Hates Investing In India

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Here’s an excerpt from a recent interview with Jim Rogers on why he prefers investing in China over India.

High oil prices, inflation, food prices etc have hit countries like India very hard. How should counties like India tackle the situation?
• Inflation affects everyone. Not just India. We pay the same price for copper. Copper price is the same in Australia, Germany and the US and India. India is not getting any worse than other countries. Except for the fact that the Indian government spends periodically more money in controlling inflation. The problem with India is that your politicians are worse than American politicians. You know Indian politicians believe and argue that the cause for inflation is commodities trading. How absurd is that.

Recently India banned Futures trading in some commodities like rice, wheat, rubber, potato etc to control price rise and inflation.
• It is the same tactic that politicians have done for hundreds of years everywhere in the world. Politicians would blame for anything wrong on three groups of people. They blame financiers/financial types. They blame foreigners: It is always good to blame foreigners. And they blame the Press. They blame you guys for commodity inflation in India. If the Press is not writing about inflation, we would not have a problem, politicians would say. It is absolutely insanity.

India banned Futures trading in some commodities without any logic or reasoning and study. And it has not done anything good for commodities in India or in the rest of the world. The commodity prices are still up and up. India needs to understand that there is no easy solution to high prices. As prices go up, people use less of anything and people would continue to produce more and that has always been there in the boom market. I read that India produces lots of foodgrains and do not have storage facilities and tonnes of rice and wheat are destroyed in public sector storage facilities.

How sad it is. It is terrible thing to happen. So let India do things to protect commodities rather than ban Futures trading in them. By banning commodities in boom market, the Indian government is making things worse. Look at China. The Chinese instituted price controls. Price controls have been around for thousands of years. They always make things worse. If you tell somebody that rice is only Rs 2, you have no other ways.

If you tell a farmer that you can sell rice only for Rs 2, he will tell I am not going to produce any more rice. Farming is hard work. I cannot make any money with price controls by producing and selling rice for Rs 2. So then you have less rice and shortage of rice. Even Romans had price controls, it never worked. So the Indian government is making things worse for India. It has been making things worse for the people in the last 50 or 60 years.

Some politicians in India blame commodity Futures trading as the reason for price rise; inflation is a big political issue in India.
•By banning commodity Futures, food prices would not go down. Because people sell in any prices they want to in Futures. So banning Futures is a senseless decision. In commodities market, we know what the price of wheat is. There is a public price for wheat according to demand and supply world over. So India banning Futures does not have any effect on wheat market. Indian government instead of being transparent and serious is creating lots of black market by banning Futures trading. It is going to make lots of people desperate. Politicians have been doing the same thing for many years, all over the world. Not just in India. It is worst for all of us.

What is the reason for the global food crisis now?
• The number of hectares of global wheat farming has declined over the years. The inventories of food are in the lowers ebb now in the last 50-60 years. In the last 30 years, farming has been in a terrible state. There is a terrible shortage of farmers now across the world. Young people do not go for farming. They study computers and get jobs. All the farmers in the world are old now. They are all men. Young people do not go to farms these days because farming is a hard physical job.

Seeds, fertilizers, tractors…there is a shortage for these stuff. We have a shortage of even tractor tyres now. That is the reason why we have shortage of food and there is a food crisis. It is not again speculators who have created the food shortage. Speculators take delivery of wheat. They don’t hoard wheat; it is the government that is hoarding wheat. It is the governments that are making the prices higher. Argentina says you cannot export wheat. A lot of counties say you cannot export wheat. The governments should call farmers to produce more and invite more people to farming by offering incentives.

When farming is coming down, governments like in India are trying to introduce price control mechanisms and bring down prices, and ban Futures. So things are getting worse. Things will be bad if it goes like this way. The food crisis will get worse, if countries act like this way. There will come a time when people will not get enough food. They are going to starve. The world is going through several weather problems. There will be droughts. So things are getting worse for farmers. I promise politicians who rule us are not going to go to the fields and cultivate. Do you think your politicians will go to the fields and work hard till evening to raise more rice? No way.

US President George Bush recently commented that it is the large population in countries like India and China that are causing the food shortage and crisis.
• I don’t agree. Look how things are blown out of proportion by politicians. Why can’t the people in Asia eat and live happily? Is it the prerogative of the US that only they should eat? There are three billion people in Asia. Thirty yeas ago Mao Tse-Tung was still running China. Thirty years ago Indira Gandhi was running India. Vietnam was destroyed.

Now there are three billion people in Asia, working hard, saving and investing. They want to eat more and they should. There is nothing wrong in that. Why should the developed world say that you should not eat? That is discrimination. I hope Asia continues to consume more so that their standards of living would go higher. All the western politicians who say that Asia should not eat more, let them go to the fields and work hard and produce more wheat, rice and maize so that food prices do not go higher.

Do you think India and China are driving the global commodities prices?
• Not just India and China. Most countries are driving the global commodities prices. America consumes lots of sugar, wheat and petrol. Europe does, everybody does. If America stops using petrol, there will be lots of petrol available in the world. If Europe stops eating wheat, there will be lots of wheat available. So what I want to say is that everyone is driving the global commodities prices. Everyone in the world is driving the demand for everything.

Which is the commodity you are most bullish on these days? Gold or Crude Oil?
• I am not particularly bullish on a commodity. I am in fact bullish on all commodities. I am not a good market timer. I am a very good or a very bad sure time trader. So I have no idea. I own all the commodities. I go to commodities based on historic fundamentals.

You recently said that it is the right time to invest in agri-commodities. Is there great investing opportunities in agri-commodities?
• I have bought into agri-commodities recently. I am an admirer of agri-commodities, and I hope there are great investing opportunities there. I make plenty of mistakes. But I try to buy commodities cheap. And agri-commodities are cheap and thus hold great investing potential.

What do you think of Indian stock market? Is it overheated and overpriced?
• It was certainly overheated, and that is why it has come down crashing recently. I am not a good judge of the Indian stock markets. Sometimes I get the Indian stock markets exactly right. Sometimes I get it exactly wrong. So I am not a good judge. So, I would not buy Indian stocks because it is too high. And your government continues to do stupid things like don’t trade in commodities. So if I am a foreigner I cannot invest in Indian commodities. It is sad. Vietnam recently said all the problems is because of importing gold. So don’t import gold. So Vietnamese cannot import gold.

Most astonishing thing. So governments keep doing these kinds of things. Vietnam said their problems are because people have been buying gold. Come on, how crazy can you go? Don’t worry; politicians can go crazy at any lengths. You know America said there were weapons of mass destruction in Iraq. There were not. They spent hundreds of thousands of billions and killed tens of thousands of people to find those weapons. So politicians do a lot of crazy things.

Among the three emerging nations, Russia, India and China, which one would you rate first as an investment destination?
• China, of course.

Why not India? Can you compare China with India?
• Indians have the worst bureaucracy in the world. India learned bureaucracy from the British. Indian bureaucracy has remained stagnant. Just stagnant. They do what they think only. There is no proper education, no infrastructure in India. It is the most wonderful country in the world. I admire India’s diversity. I tell my friends, if you can only visit one country in your life time, go to India. India is an amazing country.

But as a place for investment? Oh, no, I would think twice. Even Indians who have been doing great business elsewhere in the world, and when they go back to India to do business, it has not been a good experience for them. Many of them get out of the business and go back to other countries to do business.

You have driven through India?
• I have driven through India a couple of times extensively. In 1988 and 2001. It was spectacular; it was wonderful. I loved it. I love traveling across any place. You learn a lot about that place while traveling. The highway from Kolkata to Mumbai should be one of the greatest highways in the world. But the Indian infrastructure development is so bad, that it took seven days for me to cover Mumbai and Kolkata highway. But everyday in India was an adventure, which I loved. Yes, it is a great place to travel. But if you looking for efficiency and investment, it is not the right place yet.

So it is better to go to China?
• Yeah, in China, a truck driver travels 70 km an hour average. China has the best roads in the world. On the Mumbai-Kolkata road, a truck driver goes 20 km an hour. That shows the efficiency between the nations. To cross state boarders in India, it is a nightmare. In China, it is all great. In China, they do what they say. In India, the government says lots of things, and they do not do it. Yes, smart Indians make lots of money. There are several success stories in India. India has the most beautiful women in the world, but has the worst politicians and bureaucrats.

If you haven’t read his latest book, A Bull In China, I strongly recommend it.

Tax Breaks For New Home Buyers

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According to The American Housing Rescue and Foreclosure Prevention Act of 2008, passed by Congress in July, first time home buyers who purchase homes between April 8th 2008 and July 1st 2009 are eligible for a first time home buyer tax credit. They can get $7,500 tax credit or up to 10% of the value of the home for home purchases under $75,000.

There are certain conditions though. The credit has to be repaid over 15 years, so effectively it’s an interest-free loan from the government. So if you buy a home this year and claim the credit next year, you start paying $500 back in your 2010 taxes which you would file in 2011. So at least you get a few years grace period before you have to start paying it back. Not sure what happens if you sell the home in 2010, though. Maybe you might have to pay back the entire amount in a lump sum.

There are also income exemptions. The credit is phased out for individuals with modified adjusted gross income (AGI) between $75,000 and $95,000. For married couples filing a joint return, the phase out range is $150,000 to $170,000.

But the good news is that if you haven’t owned a primary residence for 3 years by the date of closing, you’re now considered a first time home buyer again!

This is the government’s way to encourage home purchases and prop up housing for as long as possible. This is their “soft landing” approach, where by they try to drag out this mess for as long as possible. Instead of having a quick easy death for banks and mortgage companies, they’re going to keep interfering and prolong the recession.

Regardless of the motives behind it, its out there for home buyers. I’m not jumping to buy at this point since I think there’s probably a little more downside next year followed by several years of stagnation.

Foreclosures have hit record highs and there are seemingly good deals all over the nation. My condo is currently in foreclosure and several of my friends have expressed an interest in buying it as an investment. I’ve told all of them to wait until they can actually cash-flow on investment property. Unlike back in 2005, where it was common to be negative several hundred dollars on an investment property, today you should be able to get 6% or better cash-on-cash return. In fact, in some places you can actually buy properties for under $5,000 and your effective return might easily cross 25% per year.

Before you rush out and start buying any property, I suggest you read the following books:

Rogers Still Bullish On Commodities

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Jim Rogers recently gave a presentation in Vancouver, Canada where he reiterated his belief that we’re in the middle of a commodities bull market. His logic is simple: the supply of paper currencies in increasing while the supply of hard commodities like aluminum and copper is dwindling. He also believes that there will be a long-term economic shift to China.

Here’s a condensed version of his speech, courtesy of the kind people at Agora Financial Publications.

The commodity bull market has a long way to go. This bull market is not magic. It’s not some crazy “cycle theory” I have. It does not fall out of the sky. It’s supply and demand. It’s simple stuff.

In the 80s and 90s, when people were calling you to buy mutual fund and stocks, no one called to say. “Let’s invest in a sugar plantation.” No one called and said, “Let’s invest in a lead mine.” Commodities were in a bear market and in a bear markets people do not invest in productive capacity. They never have. Perhaps they should have, but they’ve never done it throughout history and probably never will. There has been only one lead mine opened in the world the last 25 years. There’s been no major elephant oil fields [of more than a billion barrels] discovered in over 40 years.

Many of you were not even born the last time the world discovered a huge elephant oil field. Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of OPEC. OPEC stands for the Organization of Petroleum Exporting Countries. Indonesia is going to get thrown out because they no longer export oil, they are now net importers of oil. Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the 2nd largest importer of oil in the world. Oil fields deplete, mines depletes. This is the way the world’s been working for a few thousand years and it will always work this way. So supply has been going down for 25 years.

Meanwhile, you know what’s happening to demand. Asia’s been booming. There are three billion people in Asia. America’s growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That’s called a bull market.

One of the things you’ll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn’t matter about my theory. The fact is that it always works this way and it’s working this way now.

So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. [Editor’s note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.] This is an index fund. I do not manage it. It’s a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since Aug 1st 1998, when the fund started, it is up 471%.

I [mention this index] to show you that the commodity bull market is not something that will happen someday. It’s in process right now, and it’s going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof. There will be setbacks along the way. I don’t know when or why, but I know they are coming, cause markets always work that way. Commodities have done 15 times better than stocks in this decade and they’re going to continue that [trend].

You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She’s very happy owning commodities. She doesn’t care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.

Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you’re not ever going to get rich diversifying. I assure you. But if you DO diversify, commodities are the best anchor because they are not going to do what the rest of your assets are going to do.

I will give you one brief case study about oil, because it’s one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called ARAMCO. It was nationalized in the 70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit [of Saudi oil reserves] and came to the conclusion that Saudi Arabia had 245 billion barrels of oil. Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – 20 years in a row – Saudi Arabia has announced, “We have 260 billion barrels of oil.”

It is the damndest thing. 20 years; it never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me go to Saudi, we ask, “How can this be? How can it be that they always have 260 billion barrel of oil?” (By the way, last year they said they have 261 billion barrel of oil). And the Saudis say, “You either believe us or you don’t,” and that’s the end of the conversation.

I have never been to the Saudi oil fields, and even if I had, I wouldn’t know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually. That is the supply side. Let’s look at the demand side.

The Indians use 1/20th as much oil as their neighbors in Japan and Korea use. The Chinese use 1/10th as much per capita. There’s 2.3 billion people in India and China alone. Well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy, so are the Chinese. But if the Indians just doubled the amount of oil used per capita, they would still use only 1/10th of what the Koreans use. If the Chinese doubled their oil use, they would still be using only 1/5th what the Japanese and the Koreans are using. So you can see what kind of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side. These are simple things.

So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US dollar. My little girls own a lot of commodities. I would urge you to do the same.

While, I’m not going to be learning Chinese any time soon, I’m still holding on to my gold, silver and energy stocks. They’ve taken quite a beating this year, but I they’re still in a long-term bull market. Even though the US dollar has shown some strength in the past 2 weeks, nothing has changed in the fundamental economy. The US government is still broke, it looks like we might have a Trillion Dollar deficit by 2010, and  yet it still willing to bail-out Fannie Mae and Freddie Mac at the tax-payers expense.

The Most Expensive Home Ever Sold

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Another Russian Billionaire just paid $750 million for a house, or palace actually, in the French Mediterranean Cote d’Azur. The purchase price more than doubles the previous record.

Seems just a little too ostentatious for my tastes, but then again, I don’t have nearly a billion dollars to spend on buying a home.

In other news, the New York Post reported that a unnamed SWF (no thats not Single White Female, but rather Sovereign Wealth Fund) has earmarked $29 Billion for “investing” in foreclosed properties in the US. According to the paper, this unidentified fund has been hiring mortgage brokers all over the West Coast and instructing them to start bargin hunting for single and multi-family dwellings. That much money could buy 150,000 average U.S. homes.

Seems like a good way to get rid of your excess dollars and put them into in asset that will match inflation in the long run. And unlike the Japanese who bought up trophy properties at the peak during the 80’s, this SWF at least waited for a correction.

So along with all our gas money, now even our rent checks will end up in the Middle East! 😉

If you want to start your own real estate empire, check out these commercial and residential property listings.

Gartman Gives Up On Commodities

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Today’s guest post is by Brian McMorris of Get Wealth-Ed.

This morning (Wednesday, August 6) I was stunned by comments from Dennis Gartman as I watched Squawkbox on CNBC. Dennis Gartman is one of the most vocal commodity bulls of our time. He has been on the long side of commodities, especially energy and gold, since 2000 or before. Yet today, he came on and unequivocally said the bull market in commodities is over! Now, he is a trader, and he did not frame that comment with a period of time. Later he suggested that it was over for the near term (which might be 6 months to two years for all I know). During the show, Gartman suggested that oil would not top $145 a barrel anytime soon and might break below $70.

The lower price range aside (I don’t take that suggestion by Gartman seriously), this is not so different from my thinking. I have been watching the commodity charts and they all look the same, and what I see is not good for commodities near term. BHP Billiton does a nice job of representing the general natural resource trend, as it has a little of everything, including coal, gold, copper and iron. Using the Investools.com website ($50 a month subscription), a trend can be observed with specific triggers on the metrics of Moving Average, MACD and Stochastics.

Notice that the stock price broke below the Moving Average about July 1. About the same time, red (sell) flags occurred on the MACD and Stochastic trends. Investools analysis suggests that three red flags are a strong sell signal. Other technical analysis theory suggests that when previous support (the moving average) becomes resistance, it is a further indication the trend has changed (see the bounces off the MA on July 14 and again on about July 21). Because all the commodity charts show this pattern, it may indeed be over, as intuitively we may feel that way (notice gas prices have dropped the past 2 weeks).

The second MA test is interesting for its timing. It was on July 23 that the financials broke out to the upside after Fannie and Freddie were rescued by the Feds. We have also looked in the recent past at how Commodities and Financials are countertrend of each other right now. So, the breakdown in commodities in July has supported the surge in Financials and the broader stock market (aided by Fed support for the banks, of course). No surprise here, because commodities are a surrogate for a weak dollar, and anything that helps the dollar hurts commodity prices denominated in US dollars.
So the big question: “How long will this bear trend in Commodities last?” Yesterday on my Blog I suggested that the Chinese Olympics may be the signal of the top for the near/intermediate term for natural resource and material stocks (for the next several months). So much talk has been about the huge infrastructure buildout in China, and how China was rushing to get ready for the Olympics. As the Olympics begin, everyone will take a collective breath and know that the big buildout is done. Traders will respond accordingly using this as a signal.
Probably more important than this symbolism is the fact that the European and Asian economies are cooling off, most likely in response to decreased consumer demand in North America. Because much of consumer demand has been financed by loose credit in our banking system, it may not reignite until housing and banks have bottomed. Again, it is likely that won’t happen before mid-2009. That time frame also coincides with the post American election period and getting the majority of regulatory and tax uncertainty behind us.
What is a reasonable strategy until that time? I would suggest it is similar to the strategy followed until now, which is to invest in high dividend stocks and funds. This play has hurt me some the past year, as Value stocks really were out of favor. Some of that was due to the focus on international and commodity stocks, which don’t issue dividends. The rest was the fact that much of the high dividend stock world comes from out-of-favor sectors, like banks, insurance, REITs and consumer products.
But, eventually this high dividend strategy will prove correct. All dogs have their day. So, it is best to stick with the strategy knowing it will eventually pay off. As long as we stay diversified with our high dividend investments, we won’t be hurt by individual company failures (ala Bear Stearns). Dreman Value Income Edge Fund (DHG) is my favorite high dividend stock fund right now. Not because of recent performance, which like most high dividend funds is poor, but because it has a solid long-short hedging strategy and continues to make its dividend payments without reduction.
DHG has become much more of a commodity / natural resource play the past 6 months. When it first was introduced in late 2006, there was quite a bit of financial exposure to the high dividend bank stocks which proved disastrous from June through year end 2007. But the management team moved away from financials late last year and avoided most of the carnage early this year. To demonstrate the degree to which DHG now reflects the trend in commodities, see the attached chart comparing DHG (red line) to BHP (blue line) over the past 6 months. So, if commodities d o bounce back, DHG will go with that trend. But if commodities continue to lag the market, DHG will be able to offer high dividends to help offset the decline in commodity stocks.
Biran McMorris graduated Cum Laude in 1982 from ASU with a BSBA International Marketing and studies in Nuclear Engineering. He is the North American Industry Manager for Electronics/Solar, Robotics and Life Science Markets for SICK, Inc., a $1B global automation and instrumentation company based out of Waldkirch, Germany.

Lessons From WCI’s Bankrupcy

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I just found out from The Declining Market that Florida luxury Condo builder, WCI Communities filed Chapter 11.

Over a year ago I shorted the stock at $17. Then that jackass Carl Icahn went and put in a bid to buy the company at $22.50 a share, in order to “unlock the hidden value” of WCI’s assets. That’s when I closed my position at a loss. Apparently, there is no hidden value in the assets and WCI’s stock is now completely worthless!

Sadly, I didn’t have the fortitude or the conviction to hold my position and I cried uncle at the first sign of trouble. That same scenario was repeated when I shorted Countrywide last April. The stock went up 10% and I closed my short position. Then it went straight down!

Right now, I’m short Capital One Financial (COF). But instead of entering my position fully, I decided to venture in slowly and buy more if it goes up. I’ve entered a 50% position so far and I’m hoping it goes higher so I can short at a higher price.

I’m convinced that if people can’t pay their mortgages, then they’re sure not going to be paying the credit cards. However, there’s a chance I might be early, so I should be willing to set a wider stop-loss and be willing to hold my position for 6 months.

On my short positions, I usually set a 10% stop loss, because there is an inherent bullishness to stock prices. This bullishness does not come from my expectation of a continued rise the profitability of stocks, but rather due to inflation. Inflation causes price increases, which leads to slightly higher profits, which leads to slightly higher stocks prices!

One lesson we should all take from WCI’s bankruptcy is that even rich people make mistakes. Carl Icahn was wrong about WCI – there simply wasn’t an value to be had from its assets. Billionaire Jerry Lewis also made a mistake in buying a large chunk of Bear Stearns early this year at nearly $80/share. I was soon sold for only a couple of bucks a share to J P Morgan.

Don’t blindly buy a stock just because some famous investor is buying it!

Top 5 Greatest Investment Book Authors

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Today’s guest post comes from Ryan of Semperfinance, a military-community oriented personal finance and stock investment blog.

Education is the key to developing successful investment strategies. Blogs, websites and periodicals are great for staying up to date on the latest and greatest in the financial world, but nothing beats a good old-fashioned book for reinforcing the fundamentals and learning from the masters. Here’s a list of the top 5 investment authors every stock investor should be familiar with.

Benjamin Graham

Considered the father of value investing, he invented the Mr. Market metaphor and advised evaluating stocks as one would evaluate a business. Graham, a Columbia business school professor, published Security Analysis in the midst of the Great Depression. Anyone who can successfully sell books on stock investing during the Great Depression is worth taking a look at. Warren Buffet considers himself a disciple of Graham, even naming one of his sons (Howard Graham Buffett) after him. Every investor should be familiar with his work.

Recommended Books:

Warren Buffett

While not an author of books, Buffett has written many articles and (now famous) letters to shareholders. His writing contains homey Midwestern wisdom, jokes and pearls of investing wisdom. Buffett was greatly influenced by mentor Graham whose work he draws upon, but he has his own insights developed over many years of successful, smart investing.

Recommended Books:

Peter Lynch

Peter Lynch was an investing legend. His should be admired for his work ethic as much as his stock picks. Lynch practiced due diligence in picking stocks 24/7. Even on vacation he would ski a run, call a company to speak to the management then get back on the chairlift and do it over again. Like Buffett and Graham, Lynch advised focusing on company fundamentals and did not try to predict the market.

Recommended Books:

Tom and David Gardner

These two brothers were taught stock market investing by their father and ushered stock investing into the Internet era with their landmark website, fool.com. These guys have created the “Foolish” philosophy of bucking the trends of the “Wise” on Wall Street.

Recommended Books:

Robert Kiyosaki

Some people hate Kiyosaki, but I think he has some very good points to make. Don’t expect a lot of specific investment advice from Kiyosaki, instead he reinforces fundamental financial principles every investor should espouse.

Recommended Books:

If you haven’t read all of these books, you’re missing out on your financial education. Get started today!

Cartoon Capitalism

Posted on by Nirav
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I’m often extremely pessimistic on the state of the US economy. In public settings my doom and gloom predictions seem to depress people so I tend to restrict my rants solely to my blog. So it makes me happy when I read an article that agrees with my thoughts on the state of affairs.

CARTOON CAPITALISM
by Bill Bonner

America’s largest mortgage finance companies, Fannie and Freddie, have so much water in their lungs it will take at least $25 billion of the public’s money to save them. Possibly $300 billion. Were it up to us, we’d leave them on the beach.

But, last week, the U.S. Senate bent down and pressed its large mouth onto those gaping traps of the mortgage twins – gurgling into them a corrupt breath of life. Since the two hold one out of every two mortgages in the nation, in effect, Congress is nationalizing the U.S. housing stock itself. Henceforth, citizens will pay not only their taxes to the government, but their mortgage payments too.

In America itself, how this came to be is the subject of little concern. But despite the lack of interest, it is the subject of the next 500 words or so.

At a speech in Vancouver, James Kunstler seemed positively delighted. Finally, gasoline over $4 a gallon was going to do what generations of artistic scorn could not – destroy Fannie and Freddie’s collateral. Kunstler’s critique of American suburban vernacular architecture is that its products are not real houses at all – but “cartoon houses.” They have porches that look like real porches from a distance, but they are too narrow to sit on. They have shutters too – nailed to the wall, making them completely useless. They may have “picture” windows…looking out on nothing…or no windows at all. And they wouldn’t exist at all were it not for cheap credit and cheap gasoline.

Of course, the same may be said of America’s – and Britain’s – entire economies during the last 20 years. The loose credit that built cartoon houses also constructed cartoon economies; they look like real economies, but they are essentially perverse, consuming wealth rather than creating it.

For proof, we return to Fannie and Freddie. Here were two companies that appeared to be helping Americans own houses. But since they were created, homeowners’ equity – that portion of the house actually owned and paid for by the homeowner – fell from 70% to below 50%. Currently, Americans’ total equity is lower than their mortgage debt. As a whole, the nation’s homeowners are “upside down,” in other words. Nearly 9 million Americans have zero or negative equity already – and house prices are still falling.

How comes this to be? The answer is simple: lenders lent more than the houses were worth to people who couldn’t pay it back anyway. This Looney Tune approach to finance radiated to all points of the economy. People pretended that they earned more – spending more and more money to buy more and more goods and services – but wages did not really increase. Then, they bought houses – believing the roofs over their heads were investments, rather than consumer items. With no down payment, no proof of income, and zero interest loans – for most of the new buyers, home ownership was merely a dangerous conceit. Now that the roofs have caved in, it is a staggering burden.

The “consumer economy” was always a mockery. No serious economist ever suggested that you could get richer by consuming wealth. But that didn’t make consumerism unpopular. The more people consumed, the more GDP went up. GDP measures output, not wealth creation; but who could tell the difference? In a cartoon economy – no one. Besides, spending made people feel as though they were getting richer.

Then, whenever the consumer threatened to come to his senses, the feds rushed to “stimulate” him – by giving him more of what he least needed, more credit. More spending kept the cartoon economy running – allowing the consumer, the businessman and the speculator to add to his burden of debt. In 1971, when the United States went off the gold wagon, household debt was less than 50% of GDP. Now, it is more than 100%. And now, the poor consumer’s knees buckle; he will be forced to work the rest of his life just to keep up with his debt burden, let alone pay it off.

Even the rentiers were bamboozled by their own claptrap. Stocks rose from ’82 to 2000…fell heavily to 2002 and bounced back. For the last 10 years, shareholders have gotten little for their effort. In July of ’98, the FTSE hit a high of 5,458. This month, it has reached 5,625. And in America, if stock prices were quoted in gallons of gasoline, the Dow would take the driver no further in 2008 than it did 40 years ago.

The cartoon capitalists did it all backwards; they are supposed to exploit the workers, not be exploited by them. But while consumers and investors were going nowhere, corporate managers and Wall Street hustlers were getting rich. The two Bozos running Fannie and Freddie, for example, pocketed about $32 million between them last year – during a period in which the companies lost almost $5.2 billion – not to mention the losses to shareholders. And on Wall Street, managers paid out $250 billion in bonuses in the 4 years leading up to the credit crunch. The firms declared a profit and paid bonuses when the bets were made; they didn’t wait to see how they turned out. Thus did the big banks and big brokers become capitalists without capital, dependent on the gullibility of investors to keep them in business. And when investors began to wise up, they turned to the public for capital support.

What kind of scam is this? It may look like capitalism from a distance. But this is not real capitalism; this is cartoon capitalism – run by clowns, who sell freak investments to chump investors, and encourage the lumpen householder to ruin himself.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Bill Bonner is the founder and editor of The Daily Reckoning . He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis . I strongly recommend his latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics.

Since I mentioned that Fannie Mae and Freddie Mac were going to go bankrupt, their stocks have plummeted 50%. I think its time to start shorting other financial sectors like consumer credit card companies.