Tag Archives: Forex

Manipulation In the Financial Markets

Posted on by Nirav
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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!

Cheney Betting Against The Dollar

Posted on by Nirav
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Not exactly fresh news, but its been reported that Dick Cheney, our beloved vice-president is betting against the US Dollar. He has tens of millions of dollars in foreign government bond and currency funds and international and emerging market stocks. His excuse is that it’s in a blind fund and he doesn’t know what his advisers invest in. That sounds like complete rubbish to me. I can’t imagine someone as intelligent as Dick Cheney not knowing what a huge chunk of his reported $95 million networth is invested in.

I’ve believed for sometime now that the government actually wants a weaker dollar and have been investing accordingly, but having the vice-president profit from it is a bit too unethical. The fact that he’s been profiting from the war in Iraq through no-bid contracts to Halliburton (in which he still retains a large amount of shares) is bad enough. If this had been China, he’d have been executed for bringing dishonor to his country!

Ethics aside, at least he’s good at investing. By being bearish on the dollar and the US economy he joins the ranks of supermodels, billionaire investors and sovereign wealth funds!

But there’s significant conflict of interest. Rather than spending $2 Billion a week in Iraq, if the government was spending that money on infrastructure development we might have a better economy. A stronger economy wouldn’t need this rate cuts and government deficits wouldn’t be in the trillions of dollars. This might have conceivably led to a stronger dollar.

Instead we have a dollar that is the weakest its ever been. For the first time in history, the Swiss frank is stronger than the US dollar. Most foreign currencies have appreciated considerably against the dollar over the past 2 years and I don’t see any signs of this trend reversing.

So are you going to follow the leader and bail on US investments too? Or are you going to stick your guns and weather the storm?

What About LOR-Lazard World Dividend & Income Fund?

Posted on by Nirav
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When I first heard about LOR, I thought it meant Lord of the Rings, but no, the topic was on Lazard World Dividend & Income Fund(LOR).

I got this email from a reader:

I love your blogs. Please tell me what to think about an odd stock – LOR. They make money from high dividend stocks AND from some sort of forward contracts involving emerging market currencies.They had a 25% yield last year but are extremely volatile ( and I don’t know why!). They have a lot of institutional investors and it looks like a good dividend pick but I don’t understand how reliable the currency contracts are. Could you do an analysis of LOR?

I’m not exactly a stock picking expert, but I’ll give it a shot. First of all I looked for LOR on Yahoo! Finance to see what it meant. I got the name of the company, the stock price graph but not much other info. That’s because it’s not a stock, but rather an ETF. Ah ha! That explains the high dividend, since I don’t know of any company that is so generous with their dividends.

Accordingly, I headed over to ETFconnect, which is a great site for finding information on ETFs. I see that its in the category of “global equity” which means it invests in world-wide stocks, just the kind of thing you’d expect from its name!

It states their investment objective:

The Fund seeks total return through a combination of dividends income and capital appreciation. The Fund may pursue this objective through a world equity strategy and a short-term emerging markets and debt strategy. The Fund may invest substantially all of its net assets in between 60 to 90 world equity securities that are financially productive and high dividend yielding. It seeks to enhance income through exposure to short-term emerging market forward currency contracts and other emerging markets debt instruments, limited to 33.3 percent or less of the total leveraged assets of the Fund, which will provide exposure to emerging market currencies.

The first part seems pretty straight-forward, but I’m not too sure what the last part entails. But at least they’re not leveraged 10 to 1 on some Subprime Real-estate Mortgage Backed Securities (RMBS) & Collateralized Debt Obligations (CDOs)! Being overleveraged is what caused Bear Stearns’ Hedge funds to collapse last July.

I also see that it’s currently trading at an 8.5% discount to its Net Asset Value (NAV). This means you can buy the basket of its shares for less than what the shares currently trade for! The current dividend yield is reported to be 8.43%. That’s strange because Yahoo! finance reported it to be 25%, a fact that I verified on Google Finance by looking at the distribution in the stock chart. It seems that in addition to the dividends, there were  long and short term capital gains distributions in December 2007, which boosted the yield.

While this isn’t a bad thing in any way, one shouldn’t buy LOR expecting to see a similar 25% yield in the future. If you’re buying it for the dividend, you should expect to receive 8.5% and be happy with it. The only concern I have is whether or not that  dividend is safe.

The ETFconnect site informs us that the fund is diversified by invested in the US (35%), th UK(23%) and other countries (42%). While it doesn’t say which other countries, looking at its top holdings we see companies like Taiwan Semiconductor, ENI and Tesltra, so we know its investing in South East Asia, Brazil and Australia. I like that global diversity.

It also seems to be diversified across various industries like finance, telecom, energy, materials, consumer staples, and so on. However, from the mix of industries it’s invested in, 32% is in the Financial Sector. That I don’t like at all. Considering that Bank of America, HSBC and Citigroup are also featured in its top holdings, I’d say thats a little to much for me. While the stocks in finance sector are currently rising on the backs of the Fed’s rate cut, I expect this joy to be short lived. And I still haven’t seen any information on its’ currency trading, debt-instrument contract or whatever it was.

So I guess it’s time to look at the company’s website, Lazard Asset Management. Here we get a little more insight to the investment objective:

*The Fund will invest substantially all of its net assets in between 60 to 90 world equity securities that are financially productive and high dividend yielding.
*It seeks to enhance income through exposure to short-term, emerging market forward currency contracts and other emerging markets debt instruments (limited to 33.3% or less of the Fund’s total leveraged assets), which will provide exposure to emerging market currencies.
These two strategies are complementary, with historically low correlation to one another, which may reduce volatility.

They may have a low correlation, but as we saw with LTCM and the recent global stock market correction, all markets are correlated to the downside. I’m highly skeptical of these statistical models that tout low correlation since they always seem to fail at inopportune moments. But at least their leverage doesn’t seem excessive. At least they’re honest and inform us that

There can be no assurance that the Fund will meet its investment objective.

But the rest of their site is actually quite informative. We already know that the stock portion of the fund is diversified across various countries, industries and capitalizations so I’ll skip over that part. But we haven’t seen much info on the currency & debt portion.

The Fund’s emerging market currency and debt strategy will also be broadly diversified across countries and regions, offering the potential for portfolio diversification- with the possibility of credit and duration protection and limited interest-rate sensitivity.

Not really sure how they’re implementing this strategy, but if it works, it would be pretty useful in current economic conditions!

They also have an interesting snippet about their dividend strategy too.

While the Fund’s equity investments are not chosen for yield alone, they will generally include the highest dividend-yielding stocks on Lazard’s equity platform, as well as a selection of stocks that may potentially have significant dividend growth. This is important because:

*Typically, dividends are real earnings, not hoped-for earnings based on the potential, future growth of a stock. They also offer the potential for stable income.
*The 2003 tax bill significantly lowered the U.S, tax rate on qualified dividend income of U.S. taxpayers.

Investing in companies with a track record of long term dividend growth is a sure fire way to beat the index averages [source: The Future for Investors by Prof. Siegal]. Investing for tax savings is not something I generally consider. First the investment has to make sense. Then you look at the taxes. If you’re so rich that you’re really worried about taxes, then maybe tax-free munies are the best route for you.

Finally, there seems to be some information on the currency trading aspects.

The Fund’s unique leveraging strategy allows greater flexibility, risk management, and economic efficiency. To enhance the income potential for investors, the Fund intends to employ financial leverage, initially up to approximately 33 1/3% of total assets, by investing in forward currency contracts and/or borrowings. Leveraged assets will be used for investing in emerging market currency or debt instruments.

It should be noted though, that the Lazard World Dividend & Income Fund, does not seek to profit from utilizing a leveraged spread-play. That is to say, the Fund is not borrowing at the short-end of the yield curve in order to invest at the longer-end of the yield curve (and profit from the spread). On the contrary, the leveraged portion of the Lazard World Dividend & Income Fund invests in very short duration instruments (typically, less than 12-months), and instead seeks to profit from accessing the high yields available in emerging market local currency debt.

Using leverage is a speculative investment technique and involves certain risks.

While its commendable that they aren’t borrowing short-term and lending long-term (remember the RMBS & CDOs I mentioned?), I get the feeling that they’re trying to profit from the carry-trade. Of course, I’m not 100% certain that’s what they’re doing, but it definitely sounds like that to me. With the Swiss franc nearly at parity with the US Dollar and the Yen up 26% in the past year, it strongly looks like the carry-trade is unwinding. In fact, they could start losing money on these kinds of trades.

To conclude, I think this is a very interesting fund. I would be amazed if they could continue to deliver 25% annual dividend yields, but 8-9% definitely seems achievable.

However, I’d look at ALPINE DYNAMIC DIVIDEND FUND (ADVDX) and even American Capital Strategies (ACAS) before I allocated any funds to LOR. Note, I’m not recommending either of the 2, I’m just saying I’d take a look at them before I made any decision.

Gold Cracks $1000/Oz: Investing For A Recession

Posted on by Nirav
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gold bullion coins, krugerrands, maple leafs, australian gold nuggets, american golden eagle

Based on continuing weakness in the dollar, gold briefly breeched the $1000 level yesterday along with oil hitting an all time high of $111 per barrel. I had a really strong suspicion that we’d see $1000 gold by mid-March.

Despite what Bernanke and Paulson said last summer, the housing bubble has spread to other parts of the economy and subprime mess has not been contained. In a last ditch effort to prevent banks from collapsing, the Federal Reserve announced a bailout of Fannie Mae, Freddie Mac and other banks, promising to exchange bogus mortgages for Treasuries during a 28 day window. They named this Term Securities Lending Facility (TSLF) but it’s just a good old bail-out.

Of course, the stock markets loved this move because it means the Fed is going to prevent banks from failing. However, this $200 Billion bail-out doesn’t come without a cost. The Fed is going to have to print an extra $200 Billion to cover this deficit. But it was a clever move, because Bernanke didn’t have to cut interest rates before the 17th of March, when he’s slated to do so anyway. Another move like that might have created a panic in the markets instead!

Bloomberg reported today that OPEC is going to make about $927 Billion dollars from the sale of oil this year. That’s almost $1 Trillion dollars! Worldwide, sovereign wealth funds (SWF) are thought to be worth about $2.8 Trillion. Considering that the combined wealth of global nationalized assets is about $12 Trillion, that’s really impressive. It probably means that SWFs and OPEC will start buying up pieces of America, since they really can’t do much else with all those US Dollars. Of course, they could buy Treasuries, but it seems like everyone’s now realizing that they’re useless as the dollar keeps on devaluing. Meanwhile, the US government is helpless against stopping the sale of US assets. Our own SWF is negative $9 Trillion, so we have some catching up to do before we can actually buy anything. I think the government’s best bet is to make all those Trillion worthless by printing more and more dollars. Bernanke knows this and so far he’s doing a bang up job. Of course, this leads to severe inflation, but don’t say I didn’t warn you.

Considering how wrong our economic advisers have been so far, I think it’s safe to assume the 0.3% GDP growth that’s forecast for the year is a tad optimistic. While everyone’s still denying it, I think we’re already in a recession and along with inflation, that amounts to a 70s style stagflation scenario.

Considering that consumer spending has slowed down and is likely to continue, US companies are going to go through some tough times. How do you protect your stock investments then? You can’t sell them and move to cash, because the US dollar is sliding too. Coupled with inflation, your wealth is going to slowly (or maybe not so slowly) erode over the next several years.

Here are some investment ideas:

1. Diversify into foreign currencies: I like Australian Dollars, Swiss francs, Japanese Yen. Jim Rogers likes Chinese Remnimbi and Warren Buffett like the Brazilian Real. Take your pick.

2. Buy US giants with international exposure: Consumer staples have historically done very well over the past 60 years, regardless of the economic scenario. I like stocks with a decent dividend yield like Pfeizer (PFE), Johnson and Johnson (JNJ), Merck (MRK), Unilever (UNL), Proctor & Gamble (PG), Kraft Foods (KFT) and Anheuser-Busch (BUD).

3. Invest in agriculture: Bush’s moronic plan to reduce our reliance on foreign oil by substituting ethanol has only resulted in a surge corn prices. The economic growth in countries like China, India, Russia and Brazil is increasing the size of the world’s middle class. These people will be improving their diet and adding more meat and veggies. They’ll also be drinking more milk. There’s already surge in global prices of all of these soft commodities. There are quite a few ETFs that will help you profit from these trends, like PowerShares Agriculture (DBA) which consists of 30% soy, 28% wheat, 23% corn, 16% sugar, Van Eck Agribusiness (MOO) [8% Monsanto, 8% Mosaic, 8% Komatsu, 8% Potash Corp] and PowerShares Commodity (DBC) [33% crude oil, 20% heating oil, 14% wheat, 11% aluminum, 10% corn, 10% gold].

Along with this, a demand for fertilizer will result in compannies like Potash Corp (POT) doing very well. If you’d like to invest in milk, American Dairy (ADY) and Dairy Crest (DCG) are too suggestions, but I haven’t done much research on them.

4. Buy Gold: I don’t think it’s too late to start investing in gold. You can buy gold coins and bars, the gold ETF (GLD) or mining stocks (GDX).

5. Invest in Metals: The global boom is creating a huge increase in the demand for metals like copper, iron, aluminum, zinc, etc. Mining stocks like BHP and RIO have done very well. Indian company, Sterlite (STL) also looks like it has good long term prospects.

6. Invest in Infrastructure: Not only is America’s infrastructure collapsing, but global growth makes betting on infrastructure a safe bet. I like Brookfield Infrastructure Partners (BIP).

7. Invest in Oil and Gas: Major oil companies like Exxon-Mobile(XOM) have served its investors well for decades. I’ve also invested in direct oil drilling programs, which go out and drill wells with your money and give you a share of the proceeds. I also like Canadian Royalty Trusts that invest in oil fields. There a few new ETFs that buy heating oil and gasoline futures. I’d stay away from these as their performance is as yet unknown and they might be subject to backwardation and contango.

8. Invest in Water: Water pipes all over the US are breaking. Built after WWII, these pipes had a lifespan off about 50 years. As the nation replaces these pipes over the next several years, cast-iron pipe companies are set to make a killing. Check out NorthWest Pipe (NWPX) and the water ETF (PHO).

I don’t know about the rest of US, but Nevada and Southern California are going to face a huge water shortage in the next decade. Most of the water comes from Lake Mead and the tremendous population growth in Las Vegas and Henderson has tapped the limits on the lake’s capacity. Check out this photo:

Lake Mead Hoover Dam

Dont’ you think a company that owned the water rights in Nevada and California would make a decent amount of cash over the next few years.


Syria to promote Petro Euros

Posted on by Nirav
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I just read online that Syria just announced that it would start charging for its oil in euros instead of the tradition dollar. In researching this topic i found a very interesting article. Don’t know if its conspiracy theory or not, but its interesting reading nonetheless.

The Proposed Iranian Oil Bourse
here’s an excerpt.

The Proposed Iranian Oil Bourse
by Krassimir Petrov

I. Economics of Empires

A nation-state taxes its own citizens, while an empire taxes other nation-states. The history of empires, from Greek and Roman, to Ottoman and British, teaches that the economic foundation of every single empire is the taxation of other nations. The imperial ability to tax has always rested on a better and stronger economy, and as a consequence, a better and stronger military. One part of the subject taxes went to improve the living standards of the empire; the other part went to strengthen the military dominance necessary to enforce the collection of those taxes.

Historically, taxing the subject state has been in various forms—usually gold and silver, where those were considered money, but also slaves, soldiers, crops, cattle, or other agricultural and natural resources, whatever economic goods the empire demanded and the subject-state could deliver. Historically, imperial taxation has always been direct: the subject state handed over the economic goods directly to the empire.

For the first time in history, in the twentieth century, America was able to tax the world indirectly, through inflation. It did not enforce the direct payment of taxes like all of its predecessor empires did, but distributed instead its own fiat currency, the U.S. Dollar, to other nations in exchange for goods with the intended consequence of inflating and devaluing those dollars and paying back later each dollar with less economic goods—the difference capturing the U.S. imperial tax. Here is how this happened.

Early in the 20th century, the U.S. economy began to dominate the world economy. The U.S. dollar was tied to gold, so that the value of the dollar neither increased, nor decreased, but remained the same amount of gold. The Great Depression, with its preceding inflation from 1921 to 1929 and its subsequent ballooning government deficits, had substantially increased the amount of currency in circulation, and thus rendered the backing of U.S. dollars by gold impossible. This led Roosevelt to decouple the dollar from gold in 1932. Up to this point, the U.S. may have well dominated the world economy, but from an economic point of view, it was not an empire. The fixed value of the dollar did not allow the Americans to extract economic benefits from other countries by supplying them with dollars convertible to gold.


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