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Stock Ideas Investors Daily Edge The End of Weird Finance?
Stock Ideas Investors Daily Edge The End of Weird Finance? 
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Last Thursday, Mechel OAO (MTL:NYSE) announced record results for 2007. Here’s a snapshot: * Revenues increased 52.0% to US$6.7 billion * Operating income increased 92.59% to US$1.4 billion * Net income increased 51.4% to US$913.1 million |
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| The End of Weird Finance? |
| Saturday, 18 October 2008 | ||||||||
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Global stock and financial markets continue riding the roller coaster, primarily down! Central planners from twenty major countries around the world just met in Washington to figure out how they can stop the carnage. What are the odds of success? To date, various bailouts, takeovers, interest rate manipulations, and practically free money hasn’t done the job. Banks are afraid to lend to each other, real estate continues to plummet and the economy fizzles. Can’t Congress, the Fed and the Cheney- Bush Administration just finally decide where the taxpayer money is to go and fix this problem? What’s a couple trillion dollars amongst countrymen? You must understand the entire scope of the problem! A favorite movie amongst the males in my household is Weird Science. A couple of teenage boys managed to construct a stunningly gorgeous grown woman as their friend and ally. Kelly LeBrock starred in this zany film. She had the lips while Angelina was still in braces. 
Gordon Gekko coined the phrase “greed is good” in Wall Street. He was pretty clueless in retrospect. Gekko was a saint compared to the recent gang. Yep, I’m talking about derivatives, Oh, Say, Can You Still See? Part 11: Bailout of the World’s Largest Market? , again. If you can build a smart and sexy woman with a computer, why can’t you create your own money machine? Well, you apparently can, but it comes with no owners’ manual, warranty or fail safe switch. These derivatives are side bets between private parties. Part of the present financial crisis is represented by real estate loans that were packaged, labeled and shipped as derivative investments around the globe. New York calculated that foreigners would never figure out that the unemployed, pets or illegal immigrants couldn’t reasonably service all these bundled mortgages. Hubris is a key component of weird finance. These real estate packages were widely held and insured by Freddie and Fannie. In turn, they were also held by banks, financial institutions, insurance companies, hedge funds, mutual funds, money markets and pension plans. Real estate has plummeted in value and that, correspondingly, affects those who hold it in one form or another. Leverage works in both directions. A cascading sequence of bankruptcies, margin calls and general deleveraging has been the end result. As bad as this has been, focusing on real estate problems is only a small part of the overall picture. Someone must have pedaled multiple Jaws DVDs around NYC. The financial elite promoted derivatives to give the markets underlying stability. Side bets were made on interest rates, stocks, bonds, commodities, real estate, the weather and God only knows what else. The waters have long been shark infested.  The recently failed Lehman Brothers was loaded with derivatives. All hell has broken loose since their toxic garbage was released to seek a home. Did I mention it is next to impossible to know the true value of most derivatives? Hint…closer to zero than full value. How many entities looked to Lehman to “insure” a key portfolio position? It is fitting that JP Morgan Chase is one of the surviving large banking entities in NY. There will be no reform and there will be no end to weird finance as long as these blokes and their cronies like Paulson remain in charge. It is not the most honest financial institutions that have so far survived the carnage. Did I mention Bank of America and Goldman Sachs are still on the loose? Morgan Chase alone holds somewhere near $90 trillion of notional value in derivatives. Up to half of that is likely interest rate “swaps” or bets. Derivatives have been used to control markets. When the central planners desired low interest rates they simply moved the market in that direction with overwhelming amounts of empty paper promises (derivatives). Derivatives were for freakish profits but also fascist control of markets. Both gold and silver have been manhandled in this manner. You would be shocked to learn how little derivative failure it would require to make JP Morgan Chase join the ranks of Lehman, Bear Stearns, AIG and the other recently toasted entities. A two to five percent failure rate in their interest rate bets could easily do the job. Morgan is just one of many entities in the limelight. Let’s see now...the task is to nationalize, bailout and hyperinflate everything in sight. But the corresponding rising interest rates (inevitable) stand to implode the system. Remember those qazillions in interest rate derivatives. They explode during times of excess volatility. Not good for a system that is based on confidence in the first place. Houston (or wherever the next Prez is from) … we have a problem.  Live Resourcefully, Rusty
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