The Bear Trap

It is now being almost confirmed that the current rally has not been lead by bulls, but actually by bears, trying to escape what seems to have been a very successful bear trap.

The reasons? Volumes on the markets have been very limited for several months now, but the current rally has been some sort of self-fulfilling prophecy: the higher the markets, the more the bears felt in the trap and lost faith, buying into this rally to cover their shorts, or worst, buying because they have been sucked into believing in the V-shaped recovery and this mass hysteria with the clueless media acting as cheerleader.

As Adam Hamilton said last week: Realize that always in the markets, price action drives newsflow. It’s not the other way around as most people assume. When prices are weak, we all have a natural selection bias to seek out bearish stories in an attempt to “justify” the decline. The financial media greatly amplifies this tendency

I have been discussing this on these threads from Sovereign Speculator:

• Bears Capitulate
• Some thoughts on the bear market

But the most convincing piece of evidence is the one pointed out by Zero Hedge. It seems like most of the short positions have now been closed (click for bigger image):

China currency reserves vs US budget deficit

Following this report on Bloomberg and many other market cheerleaders:

July 16 (Bloomberg) -- China’s foreign-exchange reserves are surging again, helping the Obama administration sell unprecedented amounts of debt as it seeks to drag the world’s biggest economy out of a recession. [...]

[This is 100% nonsense: it's not because they are piling on USD that they have to buy bonds from the US Treasury. They could buy gold, oil, the whole Dow Jones Industrial, etc.]

The cash holdings are growing as the central bank sells its currency, the yuan, to prevent an appreciation that would make the country’s exports more expensive. The yuan sales mean for all the calls by China and other emerging markets for an alternative to the dollar as the world’s reserve currency, it has little choice but to keep buying U.S. government assets.

[This is 100% nonsense: printing money just creates a transfer of wealth from the the money holders to the money printers, nothing more, nothing less. Again, nothing to do with buying US Gov Assets, and worst than anything, there's no causality between the two parts of the sentence.]

Speaking to Al-Arabiya television yesterday, U.S. Treasury Secretary Timothy Geithner expressed confidence that the dollar “will remain the principal reserve currency.” The dollar rose 0.2 percent to $1.4083 per euro at 3:11 p.m. and has declined less than 1 percent this year.

[Anybody ever thought Geithner might actually say anything else? Or even express any worries about their own currency? Did Gideon Gono, Zimbabwe's Central Bank Governor ever express worries about their currency?]

Now, how do the Chinese look like with their $2 billion when you see the budget deficit of the US in 2009 and the projected one in 2010? Note: These are White House estimates. Which means they are highly understated. With a planed deficit about $1.8 trillion in 2009 and $1.3 trillion in 2010 (the 2010 figure probably includes higher income-tax revenue thanks to the V-shaped recovery), even if China would give back all their dollars to be treasuries, their reserve would be completely depleted before the end of 2010.

Once the US have recycled (actually, I should write 'wasted') all the US dollars held by the Chinese, Japanese and in the Middle East, they will be ripe for monetization at the Fed (super- to hyper-inflation).

To understand how I see this unfolding, please read my previous post.

WASHINGTON (AP) -- The government will have to borrow nearly 50 cents for every dollar it spends this year, exploding the record federal deficit past $1.8 trillion under new White House estimates.

Budget office figures released Monday would add $89 billion to the 2009 red ink -- increasing it to more than four times last year's all-time high as the government hands out billions more than expected for people who have lost jobs and takes in less tax revenue from people and companies making less money.[...]

As the economy performs worse than expected, the deficit for the 2010 budget year beginning in October will worsen by $87 billion to $1.3 trillion, the White House says. The deterioration reflects lower tax revenues and higher costs for bank failures, unemployment benefits and food stamps.[...]

Annual deficits [...] would total $7.1 trillion over 2010-2019. Even those dismal figures rely on economic projections that are significantly more optimistic -- just a 1.2 percent decline in gross domestic product this year and a 3.2 percent growth rate for 2010 -- than those of private sector economists and the Congressional Budget Office.

Gold disoveries since 1997

This is another interesting chart from the latest edition of the Gold Investment Digest published by the World Gold Council:As you can see, gold discoveries, both in numbers and number of ounces have collapsed by 90% in 10 years. It means that mining gold from the ground is getting more and more difficult and that gold, already a very scarce commodity, is become exponentially more scarce.

Gold ETF Holdings since 2003

This is an interesting chart from the latest edition of the Gold Investment Digest published by the World Gold Council:
The conclusion is that gold investment has been consistently increasing for quite some time, but more interestingly, that investment in gold are sticky and that the crisis has accelerated the move into gold, even while prices were declining.

Historical Annual S&P 500 Earnings

I have been pointing out for quite some time the extreme overvalution of the S&P 500 and the US markets more generally.

Here's an interesting chart from chartoftheday.com — I don't think any comment is required:

US Bailout Cost Could Reach $23.7 Trillion

I think those who still believe that the US dollar and the treasuries are safe havens and that the US will be in better shape than the other western countries after the crisis (if the Greater Depression ever ends...) might hit the wall of reality at full speed... I would say the UK are in worse shape than the US, that would be for sure, but the Eurozone with Germany and France will probably be better off, even if you include Spain, Portugal, Italy and Greece... But Ireland might be a big drag for the Eurozone. Denmark might also be in same bag as the UK.

July 20 (Bloomberg) -- U.S. taxpayers may be on the hook for as much as $23.7 trillion to bolster the economy and bail out financial companies, said Neil Barofsky, special inspector general for the Treasury’s Troubled Asset Relief Program.

It's worth reading the full report.

Bernanke's (missing) exit strategy

Ben Bernanke, probably the biggest fool since John Law, has been very vocal lately trying to justify his actions and reassure people and politicians that he had a plan. So he went to congress and even wrote a long opinion in the Wall Street Journal (has the WSJ become a propaganda machine?) to explain his exit strategy. But yet, after reading everything he had to say, I cannot see any exit strategy. He just manages to hide the lack of any real strategy and understanding of the current crisis into long useless sentences and confidence-building market cheer leading.

Careful interpretation of his speeches reveal that that the Fed has really only two tools, selling its treasuries on the open market (the tool they have had since the beginning) and paying interest on reserves (their new tool which basically give free money to the banks).

Yet, Bernanke fails to say anything about the time frame for any action (economic conditions are not likely to warrant tighter monetary policy for an extended period) nor mentioning any actual numbers/figures in terms of tightening and targets. These show that he doesn't have any visibility nor vision about what to do next and will just keep on being reactive instead of being pro-active. Again, this is not the behavior of someone who is in control!

And, worst than anything, he fails to detail any strategy. He simply lists 5 tools (using overly complicated wording) which end up being only 2 tools when you account for double-counting. A list of tools does not constitute a strategy. The Federal Reserve's confidence in its abilities to solve problems it created in the first place is not a strategy. Confidence is a worrying and dangerous state of mind, when it's coming from these Wealth-Destroying Mad Scientists.

John Law (bap. 21 April 1671 – 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself[...]. He was responsible for the Mississippi Bubble and a chaotic economic collapse in France (Wikipedia).

Quotes from the Wall Street Journal:

The Federal Open Market Committee, which is responsible for setting U.S. monetary policy, has devoted considerable time to issues relating to an exit strategy. We are confident we have the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner. [...]

To some extent, reserves held by banks at the Fed will contract automatically, as improving financial conditions lead to reduced use of our short-term lending facilities, and ultimately to their wind down. [...] However, reserves likely would remain quite high for several years unless additional policies are undertaken. [...]

Congress granted us authority last fall to pay interest on balances held by banks at the Fed. Currently, we pay banks an interest rate of 0.25%. When the time comes to tighten policy, we can raise the rate paid on reserve balances as we increase our target for the federal funds rate.

Banks generally will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve. Moreover, they should compete to borrow any funds that are offered in private markets at rates below the interest rate on reserve balances because, by so doing, they can earn a spread without risk.[...]

Raising the rate paid on reserve balances also discourages excessive growth in money or credit, because banks will not want to lend out their reserves at rates below what they can earn at the Fed. [...]

the second means of tightening monetary policy. Here are four options for doing this.

First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants [...]

Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline.[...]

Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks—analogous to the certificates of deposit that banks offer their customers.[...]
Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market. [...]

Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.

Porsche's Volkswagen dream is now their worst nightmare

It seems like Porsche might be on the verge of collapse and is trying to get funding or even maybe get acquired by Volkswagen, which it was trying to buy just a few months ago. Financial leverage, greed, lack of economics and financial knowledge is about to make one major casualty.

July 14 (Bloomberg) -- Porsche SE may hand over its Volkswagen AG options to Qatar for free to remove liabilities tied to the derivatives and clear the way for investments from VW and the Persian Gulf state, said three people familiar with the situation.

Qatar would then pay about 5 billion euros ($7 billion) to banks that sold Porsche the call options, said the people, who declined to be identified because the talks are private. Qatar would get shares equal to 20 percent of Volkswagen, Europe’s largest carmaker. Porsche may get a nominal payment from the transaction, the people said.

“The VW options are not an asset, but a liability for Porsche,” said Jens Schattner, a Frankfurt-based analyst at Sal. Oppenheim who recommends selling Porsche shares.

Porsche no longer has the ability to exercise the options to buy VW shares after accumulating 9 billion euros in debt as it sought to take over its larger rival. The Stuttgart, Germany- based sports-car maker, which acquired 50.8 percent of VW, may have sold put options to fund the stock-option purchases, which are included as part of the 9.64 billion euros Porsche reported as “other liabilities” as of Jan. 31, according to analysts at FAIResearch and Sanford C. Bernstein.

The derivative contracts are part of the talks Porsche is holding with Qatar as Porsche and VW fight for control in a proposed merger of the carmakers. Qatar and Porsche’s family owners have been asked to take part in a planned 5 billion-euro share sale at Porsche, people familiar with the talks have said. The Qatar Investment Authority may pay 2 billion euros for a stake in Porsche, one of the people said.

Qatar needs to take over the VW options before Volkswagen would proceed with a plan to buy a 49 percent holding in Porsche’s carmaking unit, two of the people said.

[...] Qatar may end up paying nothing to Porsche for the options if the parties determine they are only a liability for Porsche, two of the people said. Qatar may also end up paying a fee if it and VW agree that the rights have intrinsic value, one of the people said.

The options helped boost Porsche’s profit to 5.6 billion euros in the six months ended Jan. 31 as VW common shares surged. The common stock has jumped to 215 euros from 33.35 euros at the end of 2004. The carmaker reported revenue of 3.04 billion euros in the period.

Porsche has gone from the potential buyer in a tie-up with VW to the company struggling to stay independent as an eight- month back-and-forth fight for control drags on. [...]

July 18 (Bloomberg) -- Volkswagen AG wants to eventually take over all of Porsche AG, the sports-car making business of Porsche SE, German magazine Der Spiegel reported, without saying where it got the information.

Volkswagen will buy Porsche AG in two tranches, the magazine reported, initially taking a 49.9 percent stake and buying the remainder at a later stage. Porsche will then become one of 10 Volkswagen brands, according to the magazine.

The takeover would value Porsche AG at about 8 billion euros ($11.3 billion), and the family owners of both carmakers will hold 50 percent of the enlarged Volkswagen-Porsche company, Spiegel said. The German state of Niedersachsen will hold 20 percent, while the Qatar Investment Authority will have a stake of between 14.9 percent and 19.9 percent, Der Spiegel said. [...]

Related posts:

• 2009-05-29 Porsche: the car maker turned to hedge fund now in financial trouble
• 2008-10-29 The best performing hedge fund this year?
• 2008-10-28 The Biggest Short-Squeeze in History

We're entering a new "New Era" where high unemployment, corporate cost cutting lead to earnings growth and V-shaped recovery

It is hard for me to believe what I am reading and hearing on the financial markets and BubbleTV:

Merrill Lynch analyst predicting 10% growth in 2009:

Investors should brace themselves for explosive economic growth in the coming quarters as trade with the United States rebounds, Merrill Lynch said Tuesday.

Economist Sheryl King said the latest Bank of Canada report suggests the economy could bounce back with several quarters of 10 per cent growth in the next year. Her report is titled: “Are markets ready for 10 per cent GDP?” The answer to her question is a solid “no.”

Federal Reserve predicting growth with raising unemployment in 2009 (June FOMC Minutes):

The staff projected that real GDP would decline at a substantially slower rate in the second quarter than it had in the first quarter and then [GDP would] increase in the second half of 2009, though less rapidly than potential output. The staff also revised up its projection for the increase in real GDP in 2010, to a pace above the growth rate of potential GDP. As a consequence, the staff projected that the unemployment rate would rise further in 2009 but would edge down in 2010.

After IBM announced that it's revenue was falling but that profits were raising on cost cutting, all the analysts in the place got ecstatic and started to predict that all the US corporations will stop bleeding money but make profits thanks to cost controls. Well, obviously this is ridiculous. If all the companies where to cut spending, you would see the following impacts:

1. Cutting spending hurts badly B2B companies
2. Cutting staff hurts badly B2C companies

So the idea that cost control can lead to the whole stock market to rebound is plain stupid.

IBM revenue falls, but profits raise:

IBM Corp. shares climbed more than 4% Friday as investors and analysts were upbeat about the technology bellwether after it reported strong second-quarter earnings and raised its earnings outlook for the rest of the year. [...]

IBM's revenue fell to $23.3 billion from $26.8 billion. However, even though sales dropped by 13%, the technology giant said it was confident enough in its earnings to raise its full-year profit forecast by 50 cents a share.

Meanwhile, the official PER of the S&P 500 at the end of June was 134 and even with inflated and manufactured earnings of the financial industry, it is unlikely to be lower than 50 in July.

[update] Also, so many companies are reporting earnings less bad than expected but it seems like exceptional items boosting punctually the quarterly report. It seems like no analyst is interested in finding out what those exceptional items are.

[update 29/07/2009] MacroMan writes: Misrepresentation in corporate earnings statements is rife; according to S&P, of the 197 SPX companies to report this quarter, only a quarter have actually earned the number reported in the headlines. Fully 63.5% stuffed "one-off" or "extraordinary" items in their income statements, while only 24 of the 197 had reported earnings that were higher than headline operating earnings. Interestingly, some of the latter were quite sizeable, courtesy of some of the worst performers of the whole crisis: Z-list financials, Ford, etc. The dispersion graph is shown below

Mad Keynesian Scientists at the SNB are winning their battle against sound currency

I had prediced back in March and yet again in June that the Mad Scientists at the head of the Swiss National Bank where on their way to destroying the Swiss Franc. Yet again, here they are:

July 20 (Bloomberg) -- Switzerland’s central bankers are breaking the will of foreign-exchange traders with their first solo currency-market interventions since 1992.
[...]
“The SNB has won its battles, and they’ve given no indication that they are ready to end this policy,” said Jessica Hoversen, an analyst in Chicago for futures broker MF Global Ltd. She advises buying euros and selling the franc when it approaches the 200-day moving average. The currency traded at 1.5196 per euro as of 11:16 a.m. in London; the 200-day average was 1.5104.

By holding back the franc, policy makers led by Chairman Jean-Pierre Roth, 63, are trying to prevent deflation from worsening the steepest recession since 1992 and restore investor confidence.[...]

Consumer prices fell in June for a fourth month, dropping 1 percent from a year earlier and matching May’s decline, which was the steepest since 1959. Gross domestic product contracted 0.8 percent in this year’s first three months, the third consecutive quarterly drop. The Swiss government cut its 2009 economic forecast on June 17, predicting GDP would drop 2.7 percent this year and 0.4 percent in 2010.

[Falling prices are good for consumers, what kind of irrational people can be against that? Only Keynesian fools.]

Central bankers also may be diminishing the franc’s status as a haven, which it shares with the dollar and the yen thanks to Switzerland’s political stability and role as a global banking center. The country hasn’t fought any foreign wars since 1815, when European nations guaranteed its neutrality.

[The Yen is not a safe haven, it's the opposite: the only reason why it's going up is because so much carry-trade Yen are coming back to Japan after 10 years of close to zero percent interest rate]

[...]

“The SNB is able to sell unlimited Swiss francs versus another currency,” Philipp Hildebrand, the bank’s vice president, said on Jan. 21. Governing Board member Thomas Jordan on Feb. 6 told the Finanz & Wirtschaft newspaper that “a somewhat weaker franc would be welcome economically.”[...]

[Currency is a measure of value. Idiots who think lowering the value of the currency is a good idea also think that shortening the defined length of the meter makes a car go faster]

“The markets so far have well understood what our intentions are,” Jordan said in a July 2 interview. “We don’t want an appreciation of the Swiss franc. If necessary, we are ready to buy foreign currencies. We don’t do that on a particular level, but we decide according to the situation in order to have a big effect. And the situation since June 18 shows that this effect has materialized.”

["We have no idea about what we should be doing, but we will make the meter as long as a foot and a kilogram weight as much as a pound"]

One more time, if this is new to you, and if you would like to understand how the CHF moved from the most highly regarded and most stable and valuable currency in the world to become such a flawed currency, I highly recommend reading Ferdinand Lips' book. It is a fantastic book, and very much worth owning as a piece of history (which hopefully, doesn't seem it's going to have a happy ending):

US	UK	DE

Previous posts:

• 2009-03-14 Switzerland starts competitive devaluation
• 2009-06-25Switzerland tries to devalue again

JPMorgan and Goldman also have Alchemists in their teams

Following Morgan Stanley last week, it is now JPMorgan's and Goldman's turn to convert lead to gold, or in the investment banking lingo, to convert Junk rated securities into investment grade securities. This sounds like a 'reverse-CDO' type of operation. It didn't work in the first way, but maybe it will work in the second?

July 15 (Bloomberg) -- Originally top-ranked securities created in repackagings of home-loan bonds last year by JPMorgan Chase & Co. and Goldman Sachs Group Inc. had their ratings cut to below investment grade by Moody’s Investors Service.

The securities were among the 15 classes of five so-called Re-REMICs from 2006 or 2008 whose grades were lowered by Moody’s because of the “deterioration in performance and ratings” of the underlying bonds, the New York-based ratings firm said in a statement today. One class rated Aaa in the JPMorgan deal from December was cut to B2, or five steps below investment grade.

Securities firms have stepped up the use of such resecuritizations this year in order to create more valuable debt to sell or restructure investors’ holdings, expanding last month from home-loan bonds to commercial-mortgage securities and collateralized loan obligations backed by company loans. More than $27 billion of home-loan bond Re-REMICs have been issued this year, up from $17 billion for all 2008, according to a report last month by Bank of America Corp.

Re-REMIC stands for “resecuritizations of real estate mortgage investment conduits,” the formal name of mortgage bonds. Some of the new securities created in the deals offer investors an additional layer of protection from losses and downgrades, which boost the capital needs of banks and insurers and can force some investors to sell debt.

For more details, please refer to the previous post.

Bank of America Urged to Pay U.S. for Merrill Accord

Following up on yesterday's post:

July 15 (Bloomberg) -- Bank of America Corp. benefited from implied federal backing on about $118 billion of Merrill Lynch & Co. assets and owes the government compensation, the chairman of a House of Representatives committee studying the purchase of Merrill said.

“If you or anyone at Bank of America made a commitment, verbal or otherwise, to enter into this deal with the United States government, I urge you to honor that commitment,” Edolphus Towns, a New York Democrat, said in a letter yesterday to Chief Executive Officer Kenneth Lewis that was obtained by Bloomberg News. “It is the right thing to do.”

Regulators say Bank of America owes at least part of a $4 billion fee it agreed to pay in January because the company benefited from U.S. backing on Merrill assets such as mortgage- backed bonds, Bloomberg News reported on July 13, citing people familiar with the matter. The Charlotte, North Carolina-based bank says it owes the Treasury nothing because the plan was never put into effect, according to the people, who declined to be identified because the negotiations are confidential.
[...]
Bank of America disclosed the guarantees Jan. 16, along with its first quarterly loss in 17 years. Its news release headlined the guarantee and called the program an “agreement.”
[...]
The plan called for the Federal Reserve, the Treasury, and Federal Deposit Insurance Corp. to participate in a loss-sharing agreement for loans, mortgage-backed securities and financial instruments that could last 10 years, according to company and Treasury documents. Most of the holdings came from Merrill Lynch, acquired Jan. 1.

The bank would pay a $4 billion fee in preferred stock and warrants, plus an annual fee of 20 basis points for undrawn amounts of the $118 billion, or $236 million, according to Treasury’s summary of terms, with more fees if the bank used the program. A basis point is 0.01 percentage point.
[...]

Repeating myself:

In any case, this shows one more time that government intervention leads to unintended consequences.

These consequences are going to be major because, irrelevant of whether BofA is right or wrong:

• BofA will not be able to get any backing when the markets collapse.
• The public image of BofA is going to get hurt.
• BofA has put itself in a position where the government can now do anything they want. They are owned...

David Einhorn's Greenlight Capital switched his holdings in GLD gold ETF into bullion

This is an interesting piece of news because it kind of means that Greenlight is committed to hold its gold position for a long time.

I don't know more than what the Bloomberg report says but it usually is more difficult to get rid of physical positions than exchange traded ETFs. But maybe he has an arrangement with the CME or LSE and can hence sell his stake in the futures market...

July 14 (Bloomberg) -- Greenlight Capital Inc., the $5 billion hedge-fund firm run by David Einhorn, told investors it switched all of its holdings in a gold exchange-traded fund into bullion during the second quarter.

“At a minimum this will provide some savings as the costs of storing gold are less than the fees” for the SPDR Gold Trust, the New York-based firm said yesterday in a letter to investors.

Einhorn, 40, told clients in January he was buying gold for the first time amid the threat of inflation from higher government spending. The firm, started in 1996, held 4.2 million shares of SPDR Gold Trust in the first quarter, making the gold- backed ETF its biggest holding. Gold has climbed 5.8 percent this year.

Bank of America is trying to avoid paying billions of dollars in fees to U.S. taxpayers

Isn't that rich? It is obvious that BofA indeed benefited from the US Gov backing. Legally, contracts do not need to be signed to be binding. It's just the proof that is more difficult to make when there's no written/signed agreement. But in the case of a public agreement like this one, I don't think it's going to be difficult to make a case against BofA...

In any case, this shows one more time that government intervention leads to unintended consequences.

These consequences are going to be major because, irrelevant of whether BofA is right or wrong:

• BofA will not be able to get any backing when the markets collapse.
• The public image of BofA is going to get hurt.
• BofA has put itself in a position where the government can now do anything they want. They are owned...

July 13 (Bloomberg) -- Bank of America Corp. is trying to avoid paying billions of dollars in fees to U.S. taxpayers for guarantees against losses at Merrill Lynch & Co., saying the rescue agreement was never signed and the funding never used.

Regulators contend Bank of America owes at least part of a $4 billion fee it agreed to pay in January -- even without a completed legal document -- because the company benefited from implied U.S. backing on about $118 billion of Merrill Lynch assets, such as mortgage-backed bonds, people familiar with the matter said. The Charlotte, North Carolina-based bank says it owes the Treasury nothing, according to the people, who declined to be identified because the negotiations are confidential.

Bank of America [...] “got a moral commitment for insurance without tendering a check, so it appears they got something for nothing,” said Representative Brad Sherman, a California Democrat on the House Financial Services Committee. “If the government takes the risk, the government needs to be paid.”

Both sides are under pressure from lawmakers who questioned whether taxpayers are being adequately rewarded for propping up lenders, and why Bank of America’s January acquisition of New York-based Merrill Lynch required a publicly funded bailout. The U.S. provided the bank $20 billion in capital plus the asset guarantees to keep Chief Executive Officer Kenneth Lewis from abandoning the takeover of money-losing Merrill, once the world’s biggest brokerage.
[...]
Both sides agree the accord was never signed and the funding went untapped, the people said. Bank spokesman Scott Silvestri and Treasury’s Andrew Williams declined to comment.
[...]
Bank of America disclosed the guarantees Jan. 16 along with its first quarterly loss in 17 years. The bank’s news release headlined the guarantee and called the program an “agreement.”
[...]
Bank of America would absorb the first $10 billion of losses, with U.S. agencies covering 90 percent of subsequent deficits, said the bank’s Jan. 16 statement. The bank “would pay a premium of 3.4 percent of those assets,” the lender said. Similar commercial accords impose fees of as much as 6 percent, said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California, research firm.

The bank would pay a $4 billion fee in the form of preferred stock and warrants, plus an annual fee of 20 basis points for undrawn amounts of the $118 billion, or $236 million, according to Treasury’s summary of terms, with more fees if the bank tapped the program. A basis point is one-hundredth of a percent. Bank of America could end the guarantee any time if the U.S. consented, with an “appropriate fee” to be negotiated, the document said.

The term sheet said it was “accepted and agreed by and among the following as of Jan. 15, 2009” and listed the bank, Treasury, Fed and Federal Deposit Insurance Corp. Each specific instrument in the pool of covered assets “must be identified on signing of the guarantee agreement,” the sheet said.
[...]
“It’s the fault of the government for never getting it signed,” said Townsend, who said his firm has purchased shares of the bank. “But part of the inherent unfairness in dealing with government is that they can manipulate all kinds of things to make your life hellish.”
[...]
“Treasury has to appear tough,” said Kevin Jacques, a former economist for the agency, referring to the Merrill Lynch guarantees. “Otherwise this will be politicized and people will say that the bank and Treasury were in this together and they just ripped off the American taxpayer,” said Jacques, now a finance professor at Baldwin Wallace College in Berea, Ohio. “There is a political cost here if they just let Bank of America walk.”

Inflation or Deflation? - 6

This is another post in the "Inflation or Deflation?" series, previous posts are available here:

1. Inflation or Deflation - 1 (07/12/2008)
   
2. Inflation or Deflation - 2 (10/12/2008)
3. Inflation or Deflation - 3 (24/01/2009)
4. Inflation or Deflation - 4 (26/01/2009)
5. Inflation or Deflation - 5 (15/02/2009)

Here are a few points that I would like to share with you. The current inflation vs deflation debate is a bit annoying, specially since nobody really wants to commit on any time frame for their predictions.

So my opinion is that on the short term, we are facing deflation in its true and original sense: declining quantity of money and credit. Obviously, with the credit bubble bursting, the mortgage industry in spades, credit card companies tightening lending, it's difficult to see anything but deflation, even if they have been printing like madmen (which they are) at the Fed.

Nonetheless, currently, the prices are not falling as one would expect when the economy falls off a cliff. Prices are actually stable for most things but houses and share prices, or maybe even are rising, as I mentioned in the past: groceries, insurance policies, health care, and all the other things that you cannot escape, like taxes, public transport, etc. Prices are rising while the 2nd birthday of the Greater Depression is just days ahead.

The other point worth mentioning is that the gold prices have been quite steady, and demand for both gold and silver has not declined at all. Even in the current dead cat bounce, with stock markets rallying 40%, and prices of gold falling about 10% and silver about 20%, the holdings of GLD, GBS, SLV, etc. have remained stable.

One thing to note is that if/when investors (and even more so, average Joe) move their savings from 0% yielding (negative yielding) into gold, the money pouring into 'the economy' via this selling will be inflationary (moving from saving account to circulation). So, in some ways, buying gold is inflationary for currencies. Even if this might be marginal, it cannot be completely discarded, since with inflation expectation rising, then actual inflation following, the trend is going to get bigger and bigger.

Finally, something that seems to have been missed somehow, is that banks lending does not lead to sustained super inflation and even less hyperinflation, since as soon as the borrowers start paying their debt or that the overstretched borrower default, the quantity of money is reduced accordingly. If we have seen in the biggest debt binge and credit bubble in history, this cannot last more than about 10 years?

Historically, lending to private enterprise and people does not lead to hyper inflation, but government printing does.

Now thinking and building about this, how does that happen? Usually (historically) this happens when the government has too much debt/commitment — passed the sustainable level. So what happens is that the weight of the debt gets so big that it cannot increase taxes enough to compensate (because you soon reach a level where increasing taxes does not increase revenue, and even decreases it).

So tax revenue fall, and to avoid defaulting on their debt governments start printing. As usual, it would be simpler to default, but those in power blindly believe that they can print and nothing will happen (does that remind you of something?). Usually, the tax revenues fall because of a (severe) recession (does that remind you of something?). The more severe the recession, the more the tax revenue decline, and the more the uneducated people expect their government to do something (does that remind you of something?).

Now add to this already dark picture, the fact that the recession is usual deflationary so that the weight of the debt become heavier and heavier and that unbearable burden will give even more reasons for the government to use the printing presses.

And when it does, the vicious circle starts:

Once the government starts printing, their currency starts falling on the forex markets. A falling currency and a debt level passed the insolvency level makes the government's debt rates to skyrocket. Soon, the currency has fallen enough and the rates have raised enough for the government becoming unable to borrow from abroad. And with the currency falling, the internal pool of savings — if not completely depleted already — becomes worthless. Then starts the hyperinflation and the implosion of the countries economy.

Surprisingly, this process seem to happen quite quickly and within 2 to 3, the rate of inflation can go above 1000%. Once started, it can reach levels completely unbelievable — if it hadn't occurred numerous times just in the past 50 years — of several million percents a year.

[More to come in the next few days]

Historical PER record value on the S&P 500

The Fed, together with the Government and BubbleVision have managed to yet again beat the official record on the PER of the S&P 500. The broad US market is now even more expensive than the highest valuations ever reached during the Tech Bubble in 2000.

The chart shows the official PER quarterly values as computed by Standard's and Poor except for the very last point, because there's no official Q2 2009 value yet.

I have already drawn my conclusions. It's time to draw your own ones.

Click for bigger image

Warren Buffett found his lost integrity?

It seems like Warren Buffett has decided that it's not the time to be a market cheerleader anymore and that getting back to the reality might be after all better than just talking his portfolio up (maybe he's actually loaded with PUTs and shorts... who knows).

In his latest inteview on ABC News, available on YouTube from this link (unfortunately, ABC has disabled the embedding function), he has some interesting comments:

• "We're not a free fall but we're not in a recovery"
• "I have never seen it [a recession] quite happen like this"
• "I don't know where it's [the unemployment rate] going to go but it's got way to go. [...] 11% wouldn't surprise me."
  
• "The numbers I was seeing told me it's going to be very very tough year."
• "It [a stimulus] is not a panacea. If a stimulus is the right thing, you hope it doesn't get watered down in many ways. Our first stimulus plan [...] every body was putting things for their own constituents".

It seems like Obama has been fooling the American by putting forward respected people like Paul Volcker and Warren Buffett. As any self-respecting politician, lying and deceiving is the name of the game for Barrack Obama, FdR. I said before: Volcker should resign. Obama does not deserve the support of these people, as he's the puppet of the Geithners and the Rubins.

Q: "During his campaign, he [Obama] threw your name as a mentor and someone he turned to for advice. How often do you speak to him now ?"
A: "Not often [laughs]"
Q: "Does he call you?"
A: "Not often, no"

Q: Do you think looking back, TARP is needed? TARP was worth it?
A: I don't think it was done in a very sophisticated way but [helped restore some confidence, even if not efficiently]

Q: What do you think about the PPIP?
A: I do not like the idea of any kind of a plan [...] where Wall Street makes a lot of money. My plan provided they do not make any money whatsoever and where the American public would make the money. [...] Wall Street owes the American people one at this point.

Ridiculous statements:

• "We were in a free fall starting in the financial markets and then spreading into the economy."
  [My comment: of course, the people collapsed under the weight of their debt and that lead to the financial collapse of the lenders. He doesn't get simple causality right...]
  
• "The best days of America by far lie ahead."
  [My comment: the American Empire is following the Roman Empire.]
  

As you can see, Warren Buffet seems against the the stimulus plans, but this doesn't prevent ABC to summarize the interview with: The "Oracle of Omaha" believes a second stimulus may be called for.

Here are the previous posts regarding Warren Buffett and Berkshire Hathaway:

• 
  
  Warren Buffett was talking his portfolio up in early May
• Yet more hypocrisy coming from Warren Buffett
• When investors start worrying about Warren Buffett's Berkshire Hathaway
  
• Warren Buffett's Berkshire Hathaway hits the wall of reality
• Losing My Integrity - Warren Buffet's Next Book?
• Warren Buffet's unhappy new year

US Bailout money: It's passed $13 trillion now

According to an article on the latest Bloomberg magazine, the total committed bailout money from the US Gov and the Fed amounts to $13.2 trillion as of June the 9th.

The tally has grown 55% since Blomberg Markets reported the size of the bailout six months ago in "How to get to $8.5 trillion" (February 2009).

The current official total debt of the US is $11.5 trillion.

Quick follow-up on the LSE - Microsoft fiasco

I wanted to quickly follow up on the post LSE-Microsoft: what was ment to happen happened I made a few days ago.

Indeed, some questions must be raised and some answers must be looked for. My main concern was that it's difficult to understand how Microsoft could allow such a major public failure to happen without trying to resolve the problem — no matter the cost — and make sure such a wildly advertised project doesn't blow up on their face.

So the assumption can be made that Microsoft probably did their best to solve the problem but that they didn't achieve.

Two reasons seem likely in my opinion. First, Microsoft probably doesn't have enough workforce based in the UK, and so they had to either send people from the US and/or rely on consultancies/business partners. This idea brings the second reason: the project was lead by Accenture, a major consultancy firm and hence they should have had all the workforce required to solve the problem, one might think.

So while I believe the failure resulted from a mixture of both the reasons, I am more than convinced that the major drag was the fact that project was outsourced to Accenture. Why? Because in my opinion the .Net platform is a very capable one and second because I have many friends who work in various consultancies and the trend is very clear in these companies. I might be wrong on both accounts, but some Googling done by a friend confirmed what my friends told me :

[quote from a post] I worked for Accenture in one of the "delivery centres" in the Eastern Europe and it was total crap. They hired 1st and 2nd year students for peanuts, and sold them as professionals to rich foreign companies. The turnover of staff was about a third - after one learned something, it was best to get out of there as soon as possible. From the posts on the glassdoor i can infer that this is the strategy accenture employs worldwide.

[another post] Accenture's usual technique is to hire students or recent graduates from technical fields, who are reasonably capable in programming and computer science but know absolutely nothing about the consulting problems at hand or the software platforms which they use. Accenture gives them a weekend's notice before allocating them in real world projects they were not trained to do. These employees are overworked, underpaid, deliver substandard services and most end up quitting after one or two years. The few who don't quit and aren't complete morons get promoted.

[Yet another one] I have to side with the "accenture is worse than incompetent" crowd.
I know of one project they worked on for the University of Minnesota redoing their financial system that they fucked up completely. I've a friend who was in the periphery of the project (he knew some of the key developers) and saw it all coming. They hire monkeys to produce documentation, and produce complete garbage code. They actually had to fire some people because they discovered they were never at their desk, but produced code. It was discovered they contracted their own jobs out to someone in India to do.
I also know someone who had to work with the "finished" product when it was first roled out, and it was a complete train wreck. (Think magic formulas and tea leaves to get what you need done). It's still largely a train wreck a year later, people have just gotten used to the train wreck.

So my conclusion is that this is an Accenture blow-up but that it is Microsoft which is going to carry the shame and the blame... Again, I might be wrong. Should you have opinion/additional information, please do not hesitate to share.

Morgan Stanley alchemists to convert junk CDOs to AAA bonds?

The 2008 collapse of the financial industry finds it source in the securitization of mortgages and all sorts of other debt (like car loans or unsecured credit card loans) where our 21st century alchemists convinced the market that they were turning junk (crap?) subprime and NINJA mortgages into AAA-rated fixed income securities and selling these so called CDOs by tranches.

A disaster that followed it, but the lessons were not learnt it seems. Here we are again, but this time, Morgan Stanley plans to turn downgraded CDOs back into bonds, and get them the AAA rating that they deserve:

July 8 (Bloomberg) -- Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Alchemist: The best-known goals of the alchemists were the transmutation of common metals into gold (called chrysopoeia) or silver (less well known is plant alchemy, or "spagyric"); the creation of a "panacea", or the elixir of life, a remedy that supposedly would cure all diseases and prolong life indefinitely; and the discovery of a universal solvent.

NINJA: N.I.N.J.A. mortgage stands for "No-Income-No-Job-or-Assets".

Oil is Iran's Curse

During the past few weeks, Iran's Islamo-fascistic regime has been in the spotlight and some of the issues that I wasn't really aware of have drawn to my attention.

I've been thinking about the causes and the origins of the problems, and also looking for reasons why these issues have not found a solution yet.

My conclusion is that all the problems of today's Iran find their origin in oil: oil is Iran's curse. And here is why:

• If Iran had no oil, the British and American wouldn't have put the dictatorial Shah in power to get access to cheap Iranian oil and create BP.
• If Iran had no oil, the American's wouldn't have pushed Saddam Hussein — their Iraqi ally at that time — to invade Iran (and lead to a 10-year-long war, killing millions and destructing the whole economy) after the revolution that forced the Shah to leave (and the Brits to lose their access to oil).
• If Iran had no oil, the current Islamo-fascistic regime would have no funding and would have collapsed a long time ago and maybe democracy would finally have reached the Iranian people.
  

Oil and the Islamo-fascistic regime [my analysis]:

With official unemployment at more than 20%, and 70% of the people being less than 30 years old, it's difficult to find any source of income for the government. Add the fact that there's no efficient way for the government to enforce and collect taxes to people who are not employed by major corporations. Add that 4 to 5 million Bacij 'black shirt' militia are on the government payroll, on top of the normal military and police forces (total population in Iran is 70 million). Finally, add the government itself and corruption.
How do you pay for all this? You have only one real source of revenue: oil and then the printing press. The government is massively printing money, but the dollars and euros (required to buy oil) pouring into the economy are providing income to be spent on their payrolls and are also preventing the Iranian currency, the Rial, from collapsing. It is also obviously allowing a massive wealth transfer from the people to those in power. With no oil, the Rial would have collapsed and those in power would be long gone.
The easy way for the international community to get rid of the Islamo-fascistic regime would be to just embargo the Iranian oil. But that would mean that the rest of the planet would have to finance this action (by paying a higher price for oil). Even though this kind of action would have been far less costly than the US war in Iraq for example — and would also bring a lot of good karma instead of hatred — it is unlikely to ever happen due to the unability of the politicians to make difficult decisions.

Shah Pahlavi and BP:

BP started out as the Anglo Persian Oil Company and was a de facto Whitehall department after Winston Churchill converted the Royal Navy ships from coal to oil. BP's confrontation with Mossadegh's Iran was the first postwar Middle East oil shock three years before Suez and led to a joint venture CIA-M16 countercoup to replace Mossy with Shah Raza Pahlavi, a self styled King of Kings who played ball with Big Oil till his own overthrow in 1979.

Iran - Iraq war:

See Wikipedia article for a description of the war.

Read:

• Confession of an Economic Hitman (amazon.com - amazon.co.uk)
• The Secret History of the American Empire (amazon.com - amazon.co.uk)
  

Look: nice ads!

UK	UK	US	US

LSE-Microsoft: what was meant to happen happened

Unfortunately, I didn't had this blog when back in 2005-2006, but I had bet with my friends that what happened today would just happen.

When the London Stock Exchange publicly announced they were ditching their good old Unix systems for new Windows 2003 Server and .Net platform, Microsoft started a huge "Get The Facts" campaign, explaining how much better Windows was compared to Linux.

I knew this would end in tears, as history keeps on repeating itself as the same had happened with a publicly traded French company (LDLC.com) and probably many more which I missed. At that time, Microsoft published many Success Stories about the switch from a Linux and Open Source software platform to Microsoft platform. Given the massive failure of their system, the LDLC lost many many clients and their price collapsed. Microsoft removed the success stories from their web site, but obviously, they didn't published any Failure Story.

Here's the storyline:

(Source) London Stock Exchange 10/27/2006
London Stock Exchange Cuts Information Dissemination Time from 30 to 2 Milliseconds
As part of its strategy to win more trading business and new customers, the London Stock Exchange needed a scalable, reliable, high-performance stock exchange ticker plant to replace its earlier system. Roughly 40 percent of the Exchange's revenues are generated by the sale of real-time information about stock prices. Using the Microsoft® .NET Framework in Windows Server® 2003 and the Microsoft SQL Server™ 2000 database, the new Infolect® system has been built to achieve unprecedented levels of performance, availability, and business agility. Launched in September 2005, it is maintaining the London Stock Exchange's world-leading service reliability record while reducing latency by a factor of 15. Its successful implementation, with support from Microsoft and Accenture, shows the London Stock Exchange's leadership in developing next-generation trading systems.

Then the unavoidable disaster occurred:

(Source) September 9, 2008 9:32 AM PDT
London Stock Exchange outage blamed on Microsoft

The WSJ reports that yesterday's 7 hour outage at the LSE is due to a proprietary platform based on Microsoft technologies.
At the heart of the problem appears to be super-fast technology that has become critical to LSE and other exchanges. Traders experienced problems connecting to TradElect, a 15-month-old proprietary LSE platform developed with Microsoft Corp. technology that the LSE has touted as allowing it to expand and speed up its capacity for trades. "Microsoft is working with the London Stock Exchange to understand the root cause of the outage," said a Microsoft spokesman.
Realistically, this could have happened with any technology choice, but it's amazing to me that the LSE is not all *nix. Details are fuzzy, so maybe this is just a desktop as opposed to a core trading system.
As Julian Goldsmith reports, this month was also the deadline for TradElect to reach 10,000 continuous messages per second. That's a pretty significant number and I can't point to a Microsoft success story processing that kind of volume.

And it took them about a year to draw the conclusion:

(Source) July 1, 2009 - 1:20 P.M. London Stock Exchange to abandon failed Windows platform

Anyone who was ever fool enough to believe that Microsoft software was good enough to be used for a mission-critical operation had their face slapped this September when the LSE (London Stock Exchange)'s Windows-based TradElect system brought the market to a standstill for almost an entire day. While the LSE denied that the collapse was TradElect's fault, they also refused to explain what the problem really wa. Sources at the LSE tell me to this day that the problem was with TradElect.

Since then, the CEO that brought TradElect to the LSE, Clara Furse, has left without saying why she was leaving. Sources in the City-London's equivalent of New York City's Wall Street--tell me that TradElect's failure was the final straw for her tenure. The new CEO, Xavier Rolet, is reported to have immediately decided to put an end to TradElect.

TradElect runs on HP ProLiant servers running, in turn, Windows Server 2003. The TradElect software itself is a custom blend of C# and .NET programs, which was created by Microsoft and Accenture, the global consulting firm. On the back-end, it relied on Microsoft SQL Server 2000. Its goal was to maintain sub-ten millisecond response times, real-time system speeds, for stock trades.

It never, ever came close to achieving these performance goals. Worse still, the LSE's competition, such as its main rival Chi-X with its MarketPrizm trading platform software, was able to deliver that level of performance and in general it was running rings about TradElect. Three guesses what MarketPrizm runs on and the first two don't count. The answer is Linux.

It's not often that you see a major company dump its infrastructure software the way the LSE is about to do. But, then, it's not often you see enterprise software fail quite so badly and publicly as was the case with the LSE. I can only wonder how many other Windows enterprise software failures are kept hidden away within IT departments by companies unwilling to reveal just how foolish their decisions to rely on archaic, cranky Windows software solutions have proven to be.

I'm sure the LSE management couldn't tell Linux from Windows without a techie at hand. They can tell, however, when their business comes to a complete stop in front of the entire world.

So, might I suggest to the LSE that they consider Linux as the foundation for their next stock software infrastructure? After all, besides working well for Chi-X, Linux seems to be doing quite nicely for the CME (Chicago Mercantile Exchange), the NYSE (New York Stock Exchange), etc., etc.

A new level of monetary insanity: Sweden invents negative nominal interest rates [updated]

Riksbank, Sweden's Central Bank, has made what no one would thought would ever be done: imposing negative nominal interest rates on savings:

The minutes from the Executive Board’s monetary policy discussion will be published on 16 July. The decision on the repo rate will apply with effect from Wednesday, 8 July. The deposit rate is at the same time cut to -0.25 per cent and the lending rate to 0.75 per cent.

In economics, nominal values are the face value of currency over long periods of time (years), whereas real values have been corrected for inflation (real vs nomindal, as explained on Wikipedia).

This probably means that you will lose money for keeping it into a savings account (and so will the depositary banks?).

Of course, this is a completely useless and stupid move, since the only real effect will be that people will start keeping their money at home in form of cash. Or, since there are always unintended consequences to governement actions, we could have: a boom in companies manufacturing or installing safes, or storage companies providing high security, or even better, a move into gold and silver bringing the collapse of the government's fiat currency.

To understand the difference between real interest rates and nominal interest rates, please refer to the following articles:

• Article on About.com
• Real interest rate on Wikipedia
• Nominal interest rate on Wikipedia

[Update] Negative interest rates happened in the past, though not to such an extent:

In a world with negative interest rates, a bank would charge you money every month for leaving funds in their care, and would pay you to borrow money from them. It is difficult to imagine such a bizarro world lasting for long. [...]

Two examples of negative interest rates are worth discussing. During the 1970s, Switzerland offered negative interest rates, but only to foreigners. This weirdness emerged because of significant speculative interest in owning Swiss francs, on which the foreign investors expected to make so much money that they were willing to pay for the privilege of holding the currency. Economists note the complexity of this example and typically treat it as a special case that does not break existing models.

[My comment: At that time, the USD was collapsing due to super inflation, and the Swiss Franc was still backed by gold]

The second example is Japan, which has had negative interest rates in the international markets intermittently since 1998. For most of this time, these were merely negative nominal rates, possible because the Japanese economy has been in deflation through this time as well. If you are borrowing at -1% and your salary contracts at -2%, the real cost of borrowing is still a positive 1%.

[My comment: This still doesn't make sense in a normal world were banks could not create money out of thin air. With negative nominal interest rates, you would be better off keeping your money and not lend it, than lend it a receive back a lesser amount.]

However, on January 24, 2003, normal Japanese domestic interest rates went negative. Banks lent money on Friday night and accepted back a smaller amount on Monday morning. Why would they do this?

[My comment: Because they are stupid?]

BP accept to receive $2 a barrel in Iraq

Last week, Iraq open an auction for oil companies to bid how much they would be willing to receive for each barrel of oil they would extract. The outcome of this auction is quite interesting.

Here are some quotes from an AP report:

Chevron Corp., the second-largest U.S. oil company behind Exxon Mobil Corp., said it decided not to submit a bid in the opening round, but didn't rule out doing so in future auctions. [...]
The first field on offer was the day's sole success story. But also underlined the government and the companies' widely differing expectations. Two consortiums, headed by British giant BP and Exxon Mobil, submitted offers for the Rumaila oil field — the largest prize on offer with 17.8 billion barrels in crude reserves. The Exxon Mobil-led consortium, which included Malaysia's Petronas, requested $4.80 per barrel for production over the minimum, while BP wanted $3.99 per barrel. The ministry was willing to pay $2 per barrel. BP agreed to match the ministry's price and won the contract for Rumaila.

Exxon Mobil, in a move mirrored by other companies throughout the day, refused to revise its bid. "Our numbers were not far from reality, and proof of that is that BP accepted our price for Rumaila," al-Shahristani said after the auction. He said he believed oil companies inflated their requests to cover security companies' fees.
But dollars aside, interest was much thinner than Iraqi officials anticipated."It's been nearly 40 years now that Iraq has failed to live up to its oil potential," said Daniel Yergin, a Pulitzer Prize winning author and chairman of IHS CERA, an energy consultancy. "It's not a foregone conclusion that these arrangements will, in themselves, do what needs to be done. It's only a beginning, and it's an uncertain beginning."
No bids were offered for the Mansouria gas field in Diyala province, home to some of Iraq's worst violence. Only one bid was submitted for each of the Bai Hassan and Kirkuk oil fields in the north, the Akkas gas field, and the Missan fields — three adjacent fields offered as one bloc.
China's CNOOC led the consortium bidding for Missan, and sought a payment of $21.40 per barrel over the baseline minimum output level. Iraq said it was willing to pay $2 per barrel.
The Zubair oil field attracted four consortiums, while the West Qurna Stage I field in the south drew interest from five groups led by France's Total, Russia's Lukoil, Spain's Repsol, Exxon and CNPC. Again, in the case of West Qurna, the bids were as much as 10 times more than what the government was willing to pay.
Officials had earlier said that any fields not agreed on would be re-offered in subsequent rounds. Al-Shahristani, however, said the top offers on all the non-awarded fields — except for Mansouria — would be presented to the cabinet for review.
The step was clearly aimed at saving the process. But it embraced the same solution that has stoked parliamentary ire.
Some lawmakers have argued that al-Shahristani's insistence on having the Cabinet approve the deals, instead of the parliament, would render the deals unconstitutional.
The political wrangling was largely an effort by the country's various political blocs to secure a stake in Iraq's oil fortunes.
But whatever its roots, the dispute has done little to calm international oil companies' angst.
The firms were already worried about Iraq's security situation, the lack of a new national oil law and the government's argument that deals struck independently with the semiautonomous Kurds in the north are illegal.[...]
The minister, however, has insisted he was working for the country's best interests. Iraqi officials have estimated that based on crude oil at $50 per barrel, the companies could have earned around $16 billion in total. Iraq, meanwhile, would have brought in over $1.7 trillion.
The company response to the bidding sends a clear signal to Iraq, said analysts.
It says "the companies will still be there, but they've made it clear what their baseline is, and that they can't go into the red even to get access to Iraqi oil," said Ciszuk. "The risks are just too great."
AP Business writers Tarek El-Tablawy in Cairo and John Porretto in Houston contributed to this report.

Sterling crisis looming

I have been forecasting the collapse of the British Pound for quite some time and I am very bearish on this currency (last post was in March 2009: GBP to be devalued by 50%-70% within next 6-12 months). The recent rally in the GBP, which follows the rally in Equities and Bonds - the market playing the V shaped extremely fast recovery - is so ridiculous that I took it as an opportunity to increase my short position and I have kept capacity to do so for the time being.

Now it seems like other people are getting worried about the GBP (Jim Rogers has been extremely bearish on it, but as far as I know, he's one of the only guru openly predicting the collapse...) so it's refreshing to see this kind of report on Bloomberg:

June 30 (Bloomberg) -- The state of the U.K. economy fills British financial historian Niall Ferguson with foreboding.

“The probability of a real sterling crisis is around one in three, and the probability of major tax hikes and cuts in public spending is roughly one in one,” the Harvard University professor says.

Ferguson’s concern stems from the deterioration in the U.K.’s public finances, which prompted Standard & Poor’s to warn on May 21 that the country could lose its AAA debt rating. The firm estimated the cost of propping up Britain’s banks at 100 billion pounds ($166 billion) to 145 billion pounds and said government debts could double to almost 100 percent of gross domestic product by 2013.

Chancellor of the Exchequer Alistair Darling said on April 22 that this year’s government deficit would hit 12.4 percent of GDP. Alan Clarke, a London-based economist at BNP Paribas SA, expects it to reach 17 percent of GDP in 2010.

Pedge Fund Performance 200906

Historical performance since October 2008 are available here.

Summary:
Pedge Fund USD
June performance: -15,39% (gross, approx)
Year to Date performance: +10,30% (gross, approx)