Since late 2016 we have entered the age of disclosures! Fasten your mental safety belt and enjoy the ride! Heretic

Friday, October 31, 2008

Power and privilege; death of the common stock. (rant)

It is interesting that various hedge funds had identical leverage of about 30:1, as people found out last year. It was obvious that there must have been a specific reason for that - and there is in fact! That article ( ) shows that the rules were recently changed allowing maximum leverage of 33.5-to-1 (up from the previous 26.4-to-1). That make me suspect that if the rules allowed an even higher leverage like 100:1 or 1000:1, banks would have used it too, because they could arbitrarily reduce the paper risk factor in their models to be always much less than that!

I have another comment: in a free market system, responsibility is tied to the principle of long-term ownership. If the whole financial system is run by a bunch of hired “paysant” managers scrambling to maximize their next quarterly bonus though their "own" bank may collapse next year, then this is NOT a capitalism! Also the idea of share ownership turns out to be very different from a true ownership of a company, if anybody can short that stock do death anytime or dilute it at will. Is it not curious that all the new deals from now on involve only and exclusively the so-called "preferred" shares that were supposed to be discouraged and obsoleted in the US market (*), or just deal with bonds. No large investor wants the common stock! Even the US government is getting the "preferreds" with warrants and a decent dividend, never the common stock! This creates an ominous precedent, that may in fact spell a death warrant for the entire stock market as we know it!

My take on it is that this is a classical attempt at creating a privilege loophole for the elite. They know that the shares trading at P/E>=20 and 2% dividend are a joke and cannot last! The Boomers financiers probably realized that such stock valuation might not even survive through the next quarter (they are good at short term planning!), thus they have created a new "stock" system that pays them a realistic dividend of 10% and has also much higher P/E in line with the historical 5-10, if one subtracts the common stock from the equation!

Saturday, October 25, 2008

Oil price - is the stock price the only true business figure?

Apparently, not anymore!

"The OPEC cut did not have any positive affect on oil prices and everybody is so depressed," said Abdullah al-Rashoud, chief executive at Riyadh-based KSB Capital Group.

I think that is the proof that oil price is now determined by factors other than the supply and demand between producers and the industrial buyers. One such factor is selling off of the future contracts on the open market to raise the cash by the speculators (hedge funds). I predict that even if they cut oil production to zero, the official crude oil price would still be falling because those who sell that paper really want to sell while those who buy that paper want less and less of it, not more. If suddenly paper oil fell to 10$/barrel and if you tried to order on the spot some physical oil at that price, you would probably be told to wait 52 weeks or go to hell. It is exactly the same with gold and silver, I think, except people have sniffed that already out but not about oil yet. The difference is that there are plenty of investors wanting to get physical delivery of silver at 9$/oz but can't, whereas no private investor has probably tried yet to buy 100,000tons of crude oil and get it physically delivered!

Falling oil future prices means simply fall of the future price of the paper contract not oil itself. It's the same with gold. It cannot of course last and sooner or later the bluff will have to be called. Already, coin dealers are charging 60% surcharge on silver coins or using ebay prices ignoring Comex spot price altogether. I wonder also, if the Comex exchange gives silver spot delivery time of 14 weeks, as some reported - does that mean that they believe that in 14 weeks time silver will be really costing 9$ and they will be able to cover, or do they believe that in 14 weeks something might happens that will make all their outstanding obligations irrelevant?