Day: November 15, 2011

Nov

2011

Are Companies Less Risky Than Countries?

Graham’s note: The following is an excerpt from my most recent Private Wealth Advisory newsletter. In it I explain how the Fed’s moves have changed investor appetite for various asset classes. To find out more about Private Wealth Advisory… Click Here!

For much of the 20^th century, sovereign bonds, particularly US Treasuries were considered the least risky assets to own. The idea was that while corporations and other entities might default or go bust, the US , which is the largest economy in the world, will always be able to meet its debt obligations by virtue of its economic strength or, at a minimum, printing money to pay back its creditors.

However, when the Great Crisis first erupted with Round One in 2008, the Governments and Central Banks of the world chose two policies to combat debt deflation.

The first was to move private sector debts, particularly toxic mortgage backed assets and derivatives, onto the public or sovereign balance sheets. This was most common in developed countries such as the US, UK, etc.

The second policy that Central Banks and Sovereign Governments chose to enact was printing money/ providing capital injections into their respective economies in an attempt to promote economic growth.

Both of these policies put sovereign balance sheets at risk/ damaged their trustworthiness. The first policy didn’t actually involve dealing with the debts via default or restructuring. Rather, the toxic debts and derivatives were merely moved from the private sector onto the public’s balance sheet. At the same time, the second policy (monetary intervention) ballooned both public debt and fiscal deficits.

As a result of this, the “risk profile” for all asset classes has changed dramatically.

Let me give you an example.

Who do you trust more from an investment perspective: Exxon Mobil or the US?

Historically, the common thought would have been the US. The US offered a better yield and was the largest, strongest economy in the world. Also, Treasuries are backed by the full faith and credit of the US Government, which has a printing press to insure you get your money back in one for or another.

Today, the issue is far more murky. Take a look at the following numbers:

	Exxon Mobil	The US of A
Debt to Market Cap/ GDP	37%	100%
Earnings/ Receipts to Market Cap/ GDP	8%	15%
Cash on Hand	$7.8 billion	$73 billion
Credit Rating	AAA	AA+
Two year annual yield	4.8%	0.31%

From a balance sheet perspective, Exxon is more attractive with less debt and a higher yield. It also has a higher credit rating and a history of increasing its payout to investors (the company has raised its dividend every year for 26 years).

In contrast, lending money to the US means receiving next to nothing in yield (0.31%). It also means you’re even more likely to see your investment lose money as Treasuries are in a bubble that will end as all bubbles do.

Other issues to consider are that the US is currently running a deficit of $1.5 trillion, sports a Debt to GDP ratio of 100% (300+% when we consider unfunded liabilities). And shows no indication of reining in these policies.

Thus, even by a quick back of the envelope analysis, we find ourselves in an environment in which a single corporation such as Exxon is actually more trustworthy (from an investment perspective) than the US Government.

This represents a complete reversal from the mentality that dominated investing for most of the last 80+ years. During that time, stocks were widely held to be riskier assets while Government bonds were considered safe: investment advisors would urge younger investors to invest heavily in stocks for “growth” while older investors who were closer to retirement were urged to invest in bonds, particularly Government bonds for “income”.

This is why the Greek default is so important for the financial world: if a sovereign nation’s bonds can lose 50% in value in a single day, the entire “risk spectrum” among asset classes has changed dramatically.

Folks, when we’re talking about entire countries going bust, then you KNOW that we’re in for a rough time. The reality is that the powers that be (the Federal Reserve and ECB) are fast losing control of the system. Bernanke’s already admitted he hasn’t got a clue how to solve the financial system’s problems. The Bank of England says we’re facing the greatest financial crisis in history. Even the IMF has warned that we’re heading towards a global financial meltdown.

The reality is that 2008 was just the warm-up. And we’re now heading into the Second Round of the GREAT CRISIS: the Sovereign Default round in which entire countries will go bust. By the time this mess ends, we’re facing systemic failure, bank holidays, debt defaults, and more.

So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from Europe’s banks imploding.

If you’re an individual investor (not a day trader) looking for the means of profiting from the European Crisis, then you NEED to check out my Private Wealth Advisory newsletter.

Private Wealth Advisory is a bi-weekly investment advisory that uses stocks and ETFs to profit from the dominant market trends. Every two weeks I outline what’s REALLY going on behind the scenes in the markets, as well as which investments will profit best from these developments.

Case in point, Private Wealth Advisory subscribers caught the initial market Collapse in August. They’ve also profited beautifully from the ongoing turmoil in Europe as well as the volatility in the US Dollar.

In fact, we just closed out our 16th straight winner yesterday. And we’ve only closed ONE LOSING trade since JUNE!

My clients include executives at many Fortune 500 companies as well as strategists at Morgan Stanley … Merrill Lynch … Wachovia … and the Royal Bank of Scotland … as well as numerous hedge funds.

I’d love for you to join us in profiting from the ongoing market volatility.
To take out an annual subscription to Private Wealth Advisory now… start profiting from the market’s gyrations (again, we’ve only closed ONE LOSING trade since June)…

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Best Regards,

Graham Summers

Nov

2011

What Other MF Globals Are Lurking In the System?

Without trust, the financial system cannot work. The regulators and Federal Reserve have done nothing to assuage these concerns. Instead they’ve shifted all trust onto their own shoulders: the defining bull argument for the market and economy is that “the Fed will save us”, or “don’t fight the Fed.”

As powerful as it may be, the Fed is not the market. And since the Fed failed to restore trust in the system by forcing all bad debts to light, the financial world has grown increasingly volatile and broken as investors grow increasingly distrustful of the system and begin to pull their money from it: investors have pulled $266 billion from stock based mutual funds since January 2008.

Nowhere is the lack of trust more apparent than in the financial sector. Indeed, it was a lack of trust between banks (inter-bank lending) that caused the credit markets to jam up in 2008, which resulted in the Crash.

That lack of trust continues to this day. In the post-Lehman collapse, instead of forcing real derivative and credit risk out into the open, the Federal Reserve and regulators instead suspended accounting standards and allowed financial firms (and other corporate entities) to continue to lie about the true state of their balance sheets.

As a result of this, the financial sector remains rife with fraud and impossible to accurately value (how can you value a business that is lying about its balance sheet?).

Those times in which a company was forced to value its assets at market prices have always seen said values losing 80%+ value in short order: consider Washington Mutual, which sported a book value north of $70 billion right up until it was sold for… $2 billion.

This type of fraud is endemic in the system. Indeed, we got a taste of just how problematic a lack of transparency can be with MF Global’s bankruptcy, in which a firm with $42 billion in assets lost over 80% of its value since August only to reveal in bankruptcy that it had stolen over $700 million worth of clients’ money.

Report: MF Global Exec Admits to Using Client Money

MF Global, the futures brokerage that imploded this week after facing a run on the bank, reportedly admitted to regulators it used client money in an apparent violation of government rules and Wall Street practices.

According to The Associated Press, an unnamed executive from the New York-based firm that is led by former Goldman Sachs chief Jon Corzine made the admission Monday morning after regulators discovered some $700 million went missing.

http://www.foxbusiness.com/industries/2011/11/01/report-regulators-probe-missing-cash-at-mf-global/#ixzz1cU1reIJt

That MF Global engaged in fraud and stole clients’ money is noteworthy. However, the far more important issue is: HOW did this company receive primary dealer status from the NY Fed this year?

The Primary Dealers are the banks that actively engage in day to day activities with the New York Fed regarding the Fed’s monetary policies. Primary Dealers also participate in US Treasury auctions.

Put another way, Primary Dealers are the most elite, well-connected financial firms in the world. They have unequal access to both the Fed and the US Treasury Dept. In order for MF Global to have attained this status it must have passed through a review by:

1) The New York Fed

2) The SEC

This is not a quick nor superficial process. According to the NY Fed’s own site:

Upon submission of a formal application, a prospective primary dealer can expect at least six months of formal consideration by the New York Fed. That consideration may include, among other things, on-site reviews of front, middle, and back office operations, review of compliance programs and discussions with compliance and credit risk management staff, discussions with senior management about business plans, financial condition, and the ability to meet FRBNY’s business needs, review of financial information, and consultation with primary supervisors and regulators.

MF Global passed through all of these reviews to became a primary dealer in February 2011. Today, a mere nine months later, the firm is in Chapter 11 and has admitted to stealing clients’ funds to maintain liquidity.

These developments reveal, beyond any doubt, that financial oversight in the US is virtually non-existent. This returns to my primary point: that trust has been lost in the system. And until it is restored, the system will remain broken.

A final note on this: the NY Fed is the single most powerful entity in charge of the Fed’s daily operations. How can any investor believe that the Fed can manage the system and restore trust when the NY Fed granted MF Global primary dealer status a mere nine months before the latter went bankrupt?

If the NY Fed cannot accurately audit a financial firm’s risks during a six month review, then there is NO WAY an ordinary investor can do so.

With that in mind, the banking system remains at HUGE risk as NO ONE, not even the Fed, knows the true exposure on financials’ balance sheets. The Fed couldn’t even accurately assess MF Global, a $40 BILLION company. How could it assess JP Morgan or the TBTFs!?!?!