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Posted: 7 April 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

 

In characteristically tough prose, several steps in the USA big banks' world were outlined as heinous cons in a piece originally written by Matt Taibbi on Rollingstone.com, and I have posted it all in several parts.

 

 

Parts 1 and 2 described Con 1 as  the "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government, Con 2 as the "DollarStore" or "Big Store" scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it. Con 3 was the “Pig in the Poke”. At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaican Switch." Someone sells you what looks like an eightball of coke in a baggie, you get home and it's baby powder. The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."

 

 

Part 3  gave you Cons 4 and 5. Con 4 – The “Rumanian Box” was one of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous "Ten Commandments for Con Men". This was a little machine that a mark would put a blank piece of paper into, only to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he's been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box. How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one. Con 5 was the “Big Mitt” All of that Rumanian box paper was made even more valuable by running it through the next stage of the grift. Michael Masters, one of the country's leading experts on commodities trading, compares this part of the scam to the poker game in the Bill Murray comedy Stripes. "It's like that scene where John Candy leans over to the guy who's new at poker and says, 'Let me see your cards,' then starts giving him advice," Masters says. "He looks at the hand, and the guy has bad cards, and he's like, 'Bluff me, come on! If it were me, I'd bet everything!' That's what it's like. It's like they're looking at your cards as they give you advice." In more ways than one can count, the economy in the bailout era turned into a "Big Mitt," the con man's name for a rigged poker game. Everybody was indeed looking at everyone else's cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop. At the same time the Fed and the Treasury were making massive, earthshaking moves like quantitative easing and TARP, they were also consulting regularly with private advisory boards that include every major player on Wall Street. The Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman, while the board advising the Fed includes bankers from Capital One and Bank of New York Mellon. That means that, in addition to getting great gobs of free money, the banks were also getting clear signals about when they were getting that money, making it possible to position themselves to make the appropriate investments.

 

The benefits of free money are outlined in a more strait-laced fashion in this video…

 

 

 

 

The final part now tells of the last two cons, the Wire, and the Reload. Enjoy it all…

 

Cheers

Stuart

 

 

 

"CON #6 THE WIRE

 

Here's the thing about our current economy. When Goldman and Morgan Stanley transformed overnight from investment banks into commercial banks, we were told this would mean a new era of "significantly tighter regulations and much closer supervision by bank examiners," as The New York Times put it the very next day. In reality, however, the conversion of Goldman and Morgan Stanley simply completed the dangerous concentration of power and wealth that began in 1999, when Congress repealed the Glass-Steagall Act — the Depression-era law that had prevented the merger of insurance firms, commercial banks and investment houses. Wall Street and the government became one giant dope house, where a few major players share valuable information between conflicted departments the way junkies share needles.

 

One of the most common practices is a thing called front-running, which is really no different from the old "Wire" con, another scam popularized in The Sting. But instead of intercepting a telegraph wire in order to bet on racetrack results ahead of the crowd, what Wall Street does is make bets ahead of valuable information they obtain in the course of everyday business.

 

Say you're working for the commodities desk of a big investment bank, and a major client — a pension fund, perhaps — calls you up and asks you to buy a billion dollars of oil futures for them. Once you place that huge order, the price of those futures is almost guaranteed to go up. If the guy in charge of asset management a few desks down from you somehow finds out about that, he can make a fortune for the bank by betting ahead of that client of yours. The deal would be instantaneous and undetectable, and it would offer huge profits. Your own client would lose money, of course — he'd end up paying a higher price for the oil futures he ordered, because you would have driven up the price. But that doesn't keep banks from screwing their own customers in this very way.

 

The scam is so blatant that Goldman Sachs actually warns its clients that something along these lines might happen to them. In the disclosure section at the back of a research paper the bank issued on January 15th, Goldman advises clients to buy some dubious high-yield bonds while admitting that the bank itself may bet against those same shitty bonds. "Our salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research," the disclosure reads. "Our asset-management area, our proprietary-trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research."

 

Banks like Goldman admit this stuff openly, despite the fact that there are securities laws that require banks to engage in "fair dealing with customers" and prohibit analysts from issuing opinions that are at odds with what they really think. And yet here they are, saying flat-out that they may be issuing an opinion at odds with what they really think.

 

To help them screw their own clients, the major investment banks employ high-speed computer programs that can glimpse orders from investors before the deals are processed and then make trades on behalf of the banks at speeds of fractions of a second. None of them will admit it, but everybody knows what this computerized trading — known as "flash trading" — really is. "Flash trading is nothing more than computerized front-running," says the prominent hedge-fund manager. The SEC voted to ban flash trading in September, but five months later it has yet to issue a regulation to put a stop to the practice.

 

Over the summer, Goldman suffered an embarrassment on that score when one of its employees, a Russian named Sergey Aleynikov, allegedly stole the bank's computerized trading code. In a court proceeding after Aleynikov's arrest, Assistant U.S. Attorney Joseph Facciponti reported that "the bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways."

 

Six months after a federal prosecutor admitted in open court that the Goldman trading program could be used to unfairly manipulate markets, the bank released its annual numbers. Among the notable details was the fact that a staggering 76 percent of its revenue came from trading, both for its clients and for its own account. "That is much, much higher than any other bank," says Prins, the former Goldman managing director. "If I were a client and I saw that they were making this much money from trading, I would question how badly I was getting screwed."

 

Why big institutional investors like pension funds continually come to Wall Street to get raped is the million-dollar question that many experienced observers puzzle over. Goldman's own explanation for this phenomenon is comedy of the highest order. In testimony before a government panel in January, Blankfein was confronted about his firm's practice of betting against the same sorts of investments it sells to clients. His response: "These are the professional investors who want this exposure."

 

In other words, our clients are big boys, so screw 'em if they're dumb enough to take the sucker bets I'm offering.

 

CON #7 THE RELOAD

 

Not many con men are good enough or brazen enough to con the same victim twice in a row, but the few who try have a name for this excellent sport: reloading. The usual way to reload on a repeat victim (called an "addict" in grifter parlance) is to rope him into trying to get back the money he just lost. This is exactly what started to happen late last year.

 

It's important to remember that the housing bubble itself was a classic confidence game — the Ponzi scheme. The Ponzi scheme is any scam in which old investors must be continually paid off with money from new investors to keep up what appear to be high rates of investment return. Residential housing was never as valuable as it seemed during the bubble; the soaring home values were instead a reflection of a continual upward rush of new investors in mortgage-backed securities, a rush that finally collapsed in 2008.

 

But by the end of 2009, the unimaginable was happening: The bubble was re-inflating. A bailout policy that was designed to help us get out from under the bursting of the largest asset bubble in history inadvertently produced exactly the opposite result, as all that government-fueled capital suddenly began flowing into the most dangerous and destructive investments all over again. Wall Street was going for the reload.

 

 

 

A lot of this was the government's own fault, of course. By slashing interest rates to zero and flooding the market with money, the Fed was replicating the historic mistake that Alan Greenspan had made not once, but twice, before the tech bubble in the early 1990s and before the housing bubble in the early 2000s. By making sure that traditionally safe investments like CDs and savings accounts earned basically nothing, thanks to rock-bottom interest rates, investors were forced to go elsewhere to search for moneymaking opportunities.

 

Now we're in the same situation all over again, only far worse. Wall Street is flooded with government money, and interest rates that are not just low but flat are pushing investors to seek out more "creative" opportunities. (It's "Greenspan times 10," jokes one hedge-fund trader.) Some of that money could be put to use on Main Street, of course, backing the efforts of investment-worthy entrepreneurs. But that's not what our modern Wall Street is built to do. "They don't seem to want to lend to small and medium-sized business," says Rep. Brad Sherman, who serves on the House Financial Services Committee. "What they want to invest in is marketable securities. And the definition of small and medium-sized businesses, for the most part, is that they don't have marketable securities. They have bank loans."

 

In other words, unless you're dealing with the stock of a major, publicly traded company, or a giant pile of home mortgages, or the bonds of a large corporation, or a foreign currency, or oil futures, or some country's debt, or anything else that can be rapidly traded back and forth in huge numbers, factory-style, by big banks, you're not really on Wall Street's radar.

 

So with small business out of the picture, and the safe stuff not worth looking at thanks to the Fed's low interest rates, where did Wall Street go? Right back into the shit that got us here.

 

One trader, who asked not to be identified, recounts a story of what happened with his hedge fund this past fall. His firm wanted to short — that is, bet against — all the crap toxic bonds that were suddenly in vogue again. The fund's analysts had examined the fundamentals of these instruments and concluded that they were absolutely not good investments.

 

So they took a short position. One month passed, and they lost money. Another month passed — same thing. Finally, the trader just shrugged and decided to change course and buy.

 

"I said, 'Fuck it, let's make some money,'" he recalls. "I absolutely did not believe in the fundamentals of any of this stuff. However, I can get on the bandwagon, just so long as I know when to jump out of the car before it goes off the damn cliff!"

 

This is the very definition of bubble economics — betting on crowd behavior instead of on fundamentals. It's old investors betting on the arrival of new ones, with the value of the underlying thing itself being irrelevant. And this behavior is being driven, no surprise, by the biggest firms on Wall Street.

 

The research report published by Goldman Sachs on January 15th underlines this sort of thinking. Goldman issued a strong recommendation to buy exactly the sort of high-yield toxic crap our hedge-fund guy was, by then, driving rapidly toward the cliff. "Summarizing our views," the bank wrote, "we expect robust flows . . . to dominate fundamentals." In other words: This stuff is crap, but everyone's buying it in an awfully robust way, so you should too. Just like tech stocks in 1999, and mortgage-backed securities in 2006.

 

To sum up, this is what Lloyd Blankfein meant by "performance": Take massive sums of money from the government, sit on it until the government starts printing trillions of dollars in a desperate attempt to restart the economy, buy even more toxic assets to sell back to the government at inflated prices — and then, when all else fails, start driving us all toward the cliff again with a frank and open endorsement of bubble economics. I mean, shit — who wouldn't deserve billions in bonuses for doing all that?

 

 

Con artists have a word for the inability of their victims to accept that they've been scammed. They call it the "True Believer Syndrome." That's sort of where we are, in a state of nagging disbelief about the real problem on Wall Street. It isn't so much that we have inadequate rules or incompetent regulators, although both of these things are certainly true. The real problem is that it doesn't matter what regulations are in place if the people running the economy are rip-off artists. The system assumes a certain minimum level of ethical behavior and civic instinct over and above what is spelled out by the regulations. If those ethics are absent — well, this thing isn't going to work, no matter what we do. Sure, mugging old ladies is against the law, but it's also easy. To prevent it, we depend, for the most part, not on cops but on people making the conscious decision not to do it.

 

That's why the biggest gift the bankers got in the bailout was not fiscal but psychological. "The most valuable part of the bailout," says Rep. Sherman, "was the implicit guarantee that they're Too Big to Fail." Instead of liquidating and prosecuting the insolvent institutions that took us all down with them in a giant Ponzi scheme, we have showered them with money and guarantees and all sorts of other enabling gestures. And what should really freak everyone out is the fact that Wall Street immediately started skimming off its own rescue money. If the bailouts validated anew the crooked psychology of the bubble, the recent profit and bonus numbers show that the same psychology is back, thriving, and looking for new disasters to create. "It's evidence," says Rep. Kanjorski, "that they still don't get it."

 

More to the point, the fact that we haven't done much of anything to change the rules and behavior of Wall Street shows that we still don't get it. Instituting a bailout policy that stressed recapitalizing bad banks was like the addict coming back to the con man to get his lost money back. Ask yourself how well that ever works out. And then get ready for the reload." The End

 


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Posted: 30 January 2012 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
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There is some good food for thought in this piece from WWW.ETMSTRATEGY.COM about how much government is best.

 

I have dropped the whole article in, but also do visit the source (link in title) and the rest of the site. NIce to read from economics-educated people with enquiring minds!

 

For me the central point is not just whether we now can emulate 60s policies from there, since clocks object to being wound back. The point I take is:- What drives our current rulers in their allocation of resource? If a Cowperthwaite for today is available, will he get a job? A hearing, even?

 

Ask youself if a person sounding like this:-  "...government is a capital consumer and a poor allocator of private capital, ... without business, there can be no government.  Private industry creates wealth, government consumes it.  In order to free up the wealth creation capacities of a nation best, .... government must get out the way. ..." would get airtime in South Afrtica today.

 

Yes we have benign projects like the National Planning Commision under way, but surely those of us who think we know best should just shut up and get out of the economy's way?

 

Sadly, I don't expect much movement here while so many in government talk of "Job Creation" - a phrase which suggests that a job, which is essentially an obvious outcome of permitted price discovery in an uncleared market of eager hirers and available workers,  can be "created" at all, presumably in a whoosh of smoke by an old man in a long beard and white robes!

 

So perhaps as a start we can discourage the phrase "job creation" wherever we find it!

 

Cheers

Stuart

 

 

To achieve 7% growth in South Africa, we should copy Hong Kong

 

 

In the 1960s, Hong Kong’s GDP per capita was roughly equal to South Africa’s.  Today, Hong Kong’s GDP per capita is around $44,413 (on a PPP basis), the 10th largest in the world.  South Africa’s GDP per capita stands around $10,243 today.
 
Hong Kong’s population grew over four times wealthier and faster than South Africa’s population in five decades with no mineral or natural resource wealth such as SA's.
 
This is not just a case of comparing diamonds with dogs.  As James Bartholomew from the Daily Reckoning explained some years ago: “Britain, in 1945, was one of the most advanced countries in the world. It had hospitals and doctors admired around the globe, some of the finest engineers and scientists, who only recently had developed the Spitfire fighter and penicillin, among other achievements. It was far richer than the vast majority of countries.
 
Conversely, Hong Kong was a Third World country, like Kenya or India, only probably even poorer than either of those. In 1945 it was described as “a barren rock”. Immediately after the war, average incomes actually fell because of the influx of penniless people. In 1960, the per capita output of Hong Kong was a mere 21.5% of what advanced Britons produced. Britain was nearly five times more productive per capita and, broadly speaking, correspondingly vastly wealthier…
 
By 1992, Hong Kong’s growth had been so outstanding - and so vastly better than Britain’s - that its output per head overtook that of the “mother country”. Hong Kong had transformed itself from being a poor relation - a poverty-stricken colony making cheap plastic toys - to Britain’s equal. Hong Kong caught up with Britain in a mere three decades.”
 
By 1997, Hong Kong's per capita output had grown to 137% of the UK's.
 
Hong Kong skyline 2009
Hong Kong skyline 2009
 
What did Hong Kong do right?  Keynesians and other interventionist economists claimed it was an "economic miracle."  However, free market economists are not too surprised by the reasons in the slightest.
   
A man by the name of John James Cowperthwaite, born a Scot, became the Financial Secretary of Hong Kong in 1961, the same year South Africa became a Republic.  Here is how he 'did' it.
   
Cowperthwaite described his style as "positive non-intervention." He kept personal tax rates at a maximum 15% for everybody, rich and poor alike.  No tax on dividends or foreign income.  The government was not allowed to borrow.  The government did not provide subsidies or charge tariffs.  A new company could be registered by filling out just a single form. In South Africa, it today takes weeks if not months to register a company.
   
In Hong Kong, government was there to serve business to the best of its ability, to make doing business and earning a living as easy as possible.  In other words, to protect the free market and property rights.  This ultimately boosted wealth much faster than any politician can in his/her wildest dreams achieve through intervention.
   
As a Telegraph obituary explained in Jan 2006, Cowperthwaite's "extreme laissez-faire economic policies created conditions for very rapid growth, laying the foundations of the colony's prosperity as an international business centre." 
 
Cowperthwaite believed that government was a capital consumer and a poor allocator of private capital, understanding the basic principle of economics that without business, there can be no government.  Private industry creates wealth, government consumes it.  In order to free up the wealth creation capacities of a nation best, the argument went, government must get out the way. 
 
John CowperthwaiteAs Cowperthwaite said himself in his first budget speech: "In the long run, the aggregate of decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is less likely to do harm than the centralised decisions of a government, and certainly the harm is likely to be counteracted faster."
 
So much for the urgent need to spending billions upon billions of taxpayer Rands to build infrastructure and in turn to "boost" the economy.
 
He strongly resisted government misallocation of resources and transfers of wealth.  An example of this came when business lobbied government to build a tunnel across Hong Kong harbour, a proposal Cowperthwaite declined and in response to which he remarked that if the project was so beneficial, someone would build it themselves, and fund it with their own money.  Ultimately the bridge was built but not before it would be economically viable, and not at the expense of taxpayers.  One ultimately spends your own money a lot more efficiently than one spends another's.
 
Another completely counterintuitive idea to the modern branch of mainstream economics, a group of economists who want to measure, quantify, and test their economic knowledge empirically, was that Cowperthwaite did not provide any national economic statistics for fear that the interventionists would be given ammunition to intervene in the free market economy.  He famously sent a British delegation of bureaucrats packing when they asked for unemployment statistics, because he simply didn't have any.
 
Last year Pravin Gordhan said it is a challenge for the government to get the economy to grow by 7% each year over the next twenty years to reduce unemployment.  Hong Kong did exactly this and more with nearly no government intervention, growing by roughly 7% for four decades.  If our government were really serious about boosting employment creation and uplifting the masses from poverty, it would take a step back and let the unfettered free market get on with it.

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Wall St. Will Find a Way Around Plan, Bogle Says

January 22, 2010, 5:17 am

 

 

President Obama wants to cut down to size those too-big-to-fail banks. But his vow on Thursday to rewrite the rules of Wall Street left many questions unanswered, including the big one: Would this really prevent another financial crisis?

 

The president’s proposals to place new limits on the size and activities of big banks rattled the stock market, but banking executives were perplexed as to how his plan would work. Indeed, many insisted the proposals, if adopted, would do little to change their businesses, The New York Times’s Sewell Chan and Eric Dash write.

 

Moreover, it was unclear if the twin proposals — to ban banks with federally insured deposits from casting risky bets in the markets, and to resist further consolidation in the financial industry — would have done much if anything to forestall the crisis that pushed the economic system to the brink of collapse in 2008. Mr. Obama appeared to be leaving crucial details to be hashed out by Congress, where partisan tussling has already threatened another reform the president supports — the creation of a consumer protection agency that would have oversight over credit cards, mortgages and other lending products.

Wall Street figures, many caught off guard by the news, reacted cautiously. “I am somewhat skeptical about how much the federal government can actually regulate,” said John C. Bogle, the founder of Vanguard, the mutual fund giant. “We need to try, but all the lawyers and geniuses on Wall Street are going to figure out ways to get around everything.” Indeed, Mr. Obama acknowledged that “an army of industry lobbyists” had already descended on Capitol Hill, but vowed, “If these folks want a fight, it’s a fight I’m ready to have.”

 

Shares of big banks fell sharply, as Mr. Obama said the banks had nearly wrecked the economy by taking “huge, reckless risks in pursuit of quick profits and massive bonuses.”

 

The administration wants to ban bank holding companies from owning, investing in or sponsoring hedge funds or private equity funds and from engaging in proprietary trading, or trading on their own accounts, as opposed to the money of their customers. Mr. Obama called the ban the Volcker Rule, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has championed the proposal. Big losses by banks in the trading of financial securities, especially mortgage-backed assets, precipitated the credit crisis in 2008 and the federal bailout. It was not clear, however, how proprietary trading activities would be defined.

 

Officials said that banks would not be permitted to use their own capital for “trading unrelated to serving customers.” Such a restriction would most likely compel banks that own hedge funds and private equity funds to dispose of them over time. Officials said, however, that executing trades on a client’s behalf and using bank capital to make a market or to hedge a client’s risk would be permissible. Federal regulators have already leaned hard on banks to curb pure proprietary trading, and the banks expect that regulators will demand more capital if they keep making risky bets, making the practice far less profitable.

 

Some of the biggest firms, applying a narrow definition, say that pure proprietary trading constituted less than 10 percent of their revenue, and in some cases far less. Morgan Stanley, for example, already abandoned all but two proprietary trading desks last year. The Buckingham Research Group estimated that the new rules would reduce revenue at Citigroup, Bank of America and JPMorgan Chase by less than 3 percent. Goldman Sachs, which typically derives a tenth of its revenue from such trading, said it would be able to contend with the new rules. “I would say pure walled-off proprietary-trading businesses at Goldman Sachs are not very big in the context of the firm,” David A. Viniar, the firm’s chief financial officer, said in a conference call.

 

Mr. Obama also is seeking to limit consolidation in the financial sector, by placing curbs on the market share of liabilities at the largest firms. Since 1994, the share of insured deposits that can be held by any one bank has been capped at 10 percent. The administration wants to expand that cap to include all liabilities, to limit the concentration of too much risk in any single bank. Officials said the measure would prevent banks at or near the threshold from making acquisitions but would not require them to shrink their business or stop growing on their own.

 

The Obama administration said the new proposals were in the “spirit of Glass-Steagall” — a reference to the Depression-era law that separated commercial and investment banking, which was repealed in 1999. Economists have debated whether the repeal of that act contributed to the crisis. The two big investment banks that imploded, Bear Stearns and Lehman Brothers, were not commercial banks, and Goldman Sachs and Morgan Stanley converted to bank holding companies only after the system started to come unglued. The industry was left buzzing with questions about timing and scope. Officials said the new restrictions would apply to overseas firms, like Barclays and UBS, with large American operations, but it was not clear how — or whether — foreign governments would go along. Officials also said the proposal called for a “reasonable transition period” for firms to comply with the rules, but the timetable was not specified.

 

Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, the president’s chief economic adviser, developed the proposals at the request of the president and worked closely with Mr. Volcker, according to White House officials. The plan was completed over the holidays and submitted to the president with a unanimous recommendation from the economic team. While Mr. Geithner and Mr. Summers debated concerns that proprietary trading was not at the heart of the recent crisis, they concluded that reforms needed to address potential sources of risk in the future.

 

Reaction on Capitol Hill also was muted, partly because neither party wanted to be seen as beholden to unpopular banks. The House bill passed last month would consolidate oversight, require stronger capital cushions for the largest banks and impose regulation of some derivatives. In many ways, the new White House proposal amplifies provisions in that bill that would have left regulators discretion over proprietary trading and excessive liability.

 

Go to Article from The New York Times »

 


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Will the guys he supported, support him?

 

[source Peter Nicholson/The Australian]

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Many high-profile sports teams are traded as trophy assets by businesses who use them as "marketing and profile" entities, and don't actually care if big losses wash through - after all it is all done with pre-tax cash.

 

Numerous US teams have experienced this, and, in the way of economic imperialism, it happens in the wider world too.

 

Outcome - daft salaries for "star" players/managers, and occasional extreme turbulence for heritage outfits like Man U and as reported here, Liverpool. To think that 'Pool's beloved Kop fan area at Anfield is named for RSA's own Spion Kop battle, where crafty Boer battle tactics carved up the Imperial British forces!

 

 

 

The Telegraph reports that English Liverpool co-owners George Gillett and Tom Hicks need to raise GBP 100 million in the next six months. If they are not able to do so, they will probably not be successful in refinancing their GBP 237 million debt with RBS and Wachovia. This was admitted by Liverpool's managing director Christian Purlow during a meeting with Spirit of Shanky, the club's supporters' union. There is no back-up plan if this cash investment is not secured said Purlow and so there is a possibility of the Americans having to sell the club at less than the valued price of GBP 500 million.

Purslow said, "One of our key priorities is to reduce the debt by £100 million. This is a requirement from our bankers and will allow us to look at more flexible and longer-term refinancing when this investment is brought in. The targeted reduction was agreed by the bank, myself and the owners when I was brought in [as managing director]. The £100 million will be made by the issuance of new shares, and will not go towards anything else other than paying down the debt, reducing it to GBP 137 million. This new investment will also mean a dilution of the current ownership."

Purslow now denies that he made any remarks about the inability of the owners to hold on to the club because of unhappiness over their ownership from the banks but the Spirit of Shanky reports that Purslow was open in criticizing the owners for having made "unforgivable" promises in 2007 when they bought the club.

Purslow does agree that Hicks and Gillett decided they could no longer support the club in the transfer market last summer, after furnishing GBP 130 million to the club in their first couple of years. "Last summer a large amount of debt was paid off by the owners personally.At the same time, it was agreed we would fund our transfer spending for the time being out of our own resources. The player account has to balance. In the past the owners have topped this account up with significant sums but we are now seeking to be self-funding, which is much more sustainable and, in fact, more in keeping with where football regulation may be heading."

These revelations indicate a bleak reality in Liverpool and contrast with what Purslow told the Spanish newspaper As when he said that he "had never and will never consider a future without Benitez" and when he said that Liverpool will never be a "selling club."


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Either way, it seems as important as any of Aesop's fables.

 

Ancient  Greek theatre had some fine traditions – with clarity and articulacy outstanding. Sometimes indeed, enigmatic tales were told, but typically it was very, very clear messages that were delivered! And certainly, in a Greek tragedy, a cruel technique commonly used was the sheer inevitability of the demise at the end. What will be the end tale of the latest hiccup – is it heading to a demise, or are we just seeing a local price being paid for too large a black market economy? Is Greece larger than Lehmans, whose collapse almost froze the velocity of money in its tracks in late 2008?

_____________________________________________________

Greece's financing problems have focused investors' attention on the growing mountain of public debt as cash-strapped governments around the world spend their way out of recession. The fear is that Greece's problems could spread, hurting financial markets. Finance ministers from the euro zone will meet on Monday, when U.S. markets are closed for the Presidents Day holiday, followed by finance ministers from the rest of the European Union on Tuesday. "What the market wants to hear is that there is a viable remedy," said Quincy Krosby, a market strategist with Prudential Financial in Newark, New Jersey. "The market will be anticipating how other problems will be handled. Can the solution be applied to the problems that may crop up in Spain, Portugal, Italy (and Ireland) because traders believe the aftershocks are not over."

Shares could struggle to make headway this week if the meeting of European finance ministers fails to reassure markets that they can contain Greece's debt problems. Some U.S. investors have been comparing Greece's debt woes to the bankruptcy of U.S. investment bank Lehman Brothers, which sent markets into a tail spin in September 2008. European government sources have been sending mixed signals to markets, suggesting a lack of consensus about how to prevent Greece's debt problems from ballooning. One source said the region's finance ministers were unlikely to put together an aid package this week.

IN THE ECONOMY LAST WEEK

On Friday China raised bank reserve requirements for the second time in as many months as it aims to cool its economy. That worried investors counting on buoyant demand from a driving force of the world recovery. Fed Chairman Ben Bernanke on Wednesday detailed how the U.S. central bank will begin to wean the economy off its extraordinary monetary stimulus, presenting another headache for markets.

(Partly from Reuters)


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Full speech at

http://www.treasury.gov.za/documents/national%20budget/2010/speech/speech2010.pdf

 

 

2010 budget speech - synopsis

 

 

-          Fluent and skilled

-          7.3% budget deficit – government spending more than its income (after a period of less)

-          Aim to reduce deficit over time, which means its borrowing level will rise

-          Taxes to rise at 12%, faster than economy overall at 8% (including inflation)

-          Effort into new industrial investment

-          Total public sector wages have shot up – and must moderate

-          Some economic costs are being shifted away from the national accounts, into infrastructure charges

-          Compassion (and cash) for the poorest

-          Tough times remain – no finance ministry can “create” wealth

 

 

 

Finance Minister Pravin Gordhan’s maiden budget speech, in which he had to take into account widely varying interests and views, against a terrible global backdrop, did so with significant finesse.

 

The fluent speech laid out a thoughtful approach to the reality we find ourselves in following the global financial crisis of 2008 and the deep recession of 2009 which also left its mark on South Africa. Having maintained his spending growth while his tax revenue fell away by R69bn on account of the weaker economy, the Minister showed a budget deficit of 7.3% of GDP over the past year – this after a period of surplus before that.

 

Over the next three years he aims to reduce this deficit to 4% of gross domestic product (GDP), partially by limiting real spending increases to 2% annually, while he expects the gradually recovering economy will start generating higher tax revenues once again. The Minister now expects GDP growth of 2.3% in 2010, 3.2% in 2011 and 3.6% in 2012. Because of high budget deficits for a number of years, the national debt is expected to rise from 23% of GDP to 40% by 2013 and eventually stabilizing by 2015 after which it may resume declining once again.

 

Though the Minister provided some compensation for the ravages of inflation to (mainly lower level) households, his tax revenues are expected to grow by 12%, much faster than the expected 8% increase in nominal GDP, indicative that some burdens will increase. R3.6bn was set aside for the new industrial policy set to be unveiled on 18 February, whose centre piece appears to be a resurrection of increased import substitution linked to infrastructure projects.

 

Also importantly, the inflation target for the SARB was left unchanged at 3%-6%, with the SARB policy described as flexible and if necessary deviating to take into account exceptional circumstances. Given the fact that the prior SARB team had the same target band, yet inflation spent acres of time above its mandated level, it is unclear what this “flexibility” may mean in the field.

 

There seem to be exchange control reforms on the way linked to the prudential approach already in place.

 

An interesting remark was that that the public sector wage bill has nearly doubled in five years, at an annual compound increase of 14%, with increases in levels of pay and in headcount. More moderate increases should be expected in years to come.

 

Besides the 25.5 cent/litre increase in the fuel levy, seemingly inevitable increases in sin (smoking and drinking) taxes, and reduced travel allowance benefits, one is left with the impression that next week will see the start of hefty increases in public sector tariffs and charges, starting with electricity but not limited thereto. Thus the Minister may not have raised income, VAT and corporate tax rates, and even given partial inflation adjustment (though clawing back some of this through higher specific taxes). The real burden increase this year will not come ‘mainly’ through the budget, but via infrastructure charging. Thus households will not escape having their real disposable incomes burdened this year and companies having their costs increased, feeding into inflation and wage demands, with implications for company earnings, employment prospects and interest rates.

 

The Minister may have been accommodative, and the economy in recovery, but for many the times will remain tough, particularly the working and middle classes that form the backbone of our modern economy. As always, great compassion was shown for the poor, in the way the income tax tables were changed, with two million more children this year qualifying for child support, and R7bn allocated extra to municipalities to shield the poor from coming electricity and water tariff increases.

Based on a piece by Cees Bruggemans

 

 


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We are interested and pleased to see tickertalk member Vuyisa Qabaka in a half page pictured spread in the Business Section of this weekend's (21 Feb) Sunday Times.

 

He is profiled by Chris Barron, who has picked up on his entrepreneurial flair - which is so clear that Vuyisa also got a mention in the Budget Speech -  http://www.treasury.gov.za/documents/national%20budget/2010/speech/speech2010.pdf   - with his Student Enterprises network project getting acclaim from Min Gordhan.

 

Vuyisa, now a Capetonian, is an old boy of Selborne College (East London) and UCT, where he still has interests and businesses.

 

Learn more about Vuyisa's approach at http://studententerprisessouthafrica.blogspot.com/

 

 

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Stuart Thompson from www.tickertalk.co.za has been invited to a debate on industry costs with an Asset Manager and Stock Broker.

 

Date      Tonight Fri 12 Mar 2010

At           19h00

On          CNBCAfrica

DSTV     Channel 410

 

It seems asset management costs may end up eroding 30-60% of your retirement wealth!

 

 see the attached

alt

 

alt

 

What is your view?

 

Regards

Stuart


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There is ongoing interest in the thorny (to customers) matter of costs in investment services.

 

As the diagram below highlights, there are potentially many, many layers of cost in the "black box" called asset management, and the effect of all of these costs can severely corrode the future value of your investment. So what? Well, it is you that is paying these costs, and that is fine - as long as you are happy with the value being added. It is thus important to know what all the costs are, whether there are any you are missing in an unnecessarily opaque structure, and what the overall impact will be - especially over time - of the structure you adopt for your investing.

 

After thinking about that, the article from New York University's Aswath Damadoran emphasises an often missed dimension of cost, and is well worth reading

I also received some interesting perspective around the CNBC debate, and will post some of these in due course

Cheers, Stuart

alt

 

 

 

Transactions Costs and Beating the Market - by Aswath Damadoran

 

 

One of my books, Investment Fables, is directed at answering one of the most puzzling questions in investments: How is that there seem to be so many ways to beat the market on paper but that so few money managers seem to do it in practice? A key reason, in my view, is that transactions costs have a much greater impact on returns than we realize.

Let's start with the good news. Both academics and practitioners have found dozens of ways to beat the market. To see the academic list of market inefficiencies, try this link:
http://www.amazon.com/Inefficient-Stock-Market-Robert-Haugen/dp/0130323667
And here is a link to sure fire money makers from practitioners:
http://www.amazon.com/Ways-Beat-Market-Hundred-Stock/dp/0793128544
Wow! Hundred ways to beat the market! Each new finding in academia seems to offer fresh opportunities for the "smart, informed" investor. The latest wave of schemes build off the behavioral finance literature. In fact, two prominent behavioral finance economists have set up their own money management firm (showing you that academics are not immune from greed):
http://www.fullerthaler.com/

Most of these beat-the-market approaches, and especially the well researched ones, are backed up by evidence from back testing, where the approach is tried on historical data and found to deliver "excess returns". Ergo, a money making strategy is born.. books are written.. mutual funds are created.

Now let's look at the bad news. The average active portfolio manager, who I assume is the primary user of these can't-miss strategies does not beat the market and delivers about 1-1.5% less than the index. That number has remained surprisingly stable over the last four decades and has persisted through bull and bear markets. Worse, this under performance cannot be attributed to "bad" portfolio mangers who drag the average down, since there is very little consistency in performance. Winners this year are just as likely to be losers next year...

So, why do portfolios that perform so well in back testing not deliver results in real time? The biggest culprit, in my view, is transactions costs, defined to include not only the commission and brokerage costs but two more significant costs - the spread between the bid price and the ask price and the price impact you have when you trade. The strategies that seem to do best on paper also expose you the most to these costs. Consider one simple example: Stocks that have lost the most of the previous year seem to generate much better returns over the following five years than stocks have done the best. This "loser" stock strategy was first listed in the academic literature in the mid-1980s and greeted as vindication by contrarians. Later analysis showed, though, that almost all of the excess returns from this strategy come from stocks that have dropped to below a dollar (the biggest losing stocks are often susceptible to this problem). The bid-ask spread on these stocks, as a percentage of the stock price, is huge (20-25%) and the illiquidity can also cause large price changes on trading - you push the price up as you buy and the price down as you sell. Removing these stocks from your portfolio eliminated almost all of the excess returns.

In perhaps the most telling example of slips between the cup and lip, Value Line, the data and investment services firm, got great press when Fischer Black, noted academic and believer in efficient markets, did a study where he indicated that buying stocks ranked 1 in the Value Line timeliness indicator would beat the market. Value Line, believing its own hype, decided to start mutual funds that would invest in its best ranking stocks. During the years that the funds have been in existence, the actual funds have underperformed the Value Line hypothetical fund (which is what it uses for its graphs) significantly.

In closing, I am not trying to dissuade you from being an active investor; I am one. My point is that you should be careful about taking the claims by anyone - academic on practitioner - about market-beating strategies. The market is certainly not efficient, if you define efficiency as an all-knowing, rational market, but it certainly seems efficient, if you define efficiency as investors being unable to take advantage of market mistakes. Talking about making money is easy.. actually making money is far more difficult.

 

 


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In some characteristically tough prose, several steps in the USA big banks' world are outlined as heinous cons. The original was written was written by Matt Taibbi on Rollingstone.com, and I will post more of the article in future posts

 

Cheers

Stuart

 

 

 

 

Wall Street's Bailout Hustle

Goldman Sachs and other big banks aren't just pocketing the trillions we gave them to rescue the economy - they're re-creating the conditions for another crash

 

 

"On January 21st, Lloyd Blankfein left a peculiar voicemail message on the work phones of his employees at Goldman Sachs. Fast becoming America's pre-eminent Marvel Comics supervillain, the CEO used the call to deploy his secret weapon: a pair of giant, nuclear-powered testicles. In his message, Blankfein addressed his plan to pay out gigantic year-end bonuses amid widespread controversy over Goldman's role in precipitating the global financial crisis.

 

The bank had already set aside a tidy $16.2 billion for salaries and bonuses — meaning that Goldman employees were each set to take home an average of $498,246, a number roughly commensurate with what they received during the bubble years. Still, the troops were worried: There were rumors that Dr. Ballsachs, bowing to political pressure, might be forced to scale the number back. After all, the country was broke, 14.8 million Americans were stranded on the unemployment line, and Barack Obama and the Democrats were trying to recover the populist high ground after their bitch-whipping in Massachusetts by calling for a "bailout tax" on banks. Maybe this wasn't the right time for Goldman to be throwing its annual Roman bonus orgy.

 

Not to worry, Blankfein reassured employees. "In a year that proved to have no shortage of story lines," he said, "I believe very strongly that performance is the ultimate narrative."

 

Translation: We made a shitload of money last year because we're so amazing at our jobs, so fuck all those people who want us to reduce our bonuses.

 

Goldman wasn't alone. The nation's six largest banks — all committed to this balls-out, I drink your milkshake! strategy of flagrantly gorging themselves as America goes hungry — set aside a whopping $140 billion for executive compensation last year, a sum only slightly less than the $164 billion they paid themselves in the pre-crash year of 2007. In a gesture of self-sacrifice, Blankfein himself took a humiliatingly low bonus of $9 million, less than the 2009 pay of elephantine New York Knicks washout Eddy Curry. But in reality, not much had changed. "What is the state of our moral being when Lloyd Blankfein taking a $9 million bonus is viewed as this great act of contrition, when every penny of it was a direct transfer from the taxpayer?" asks Eliot Spitzer, who tried to hold Wall Street accountable during his own ill-fated stint as governor of New York.

 

Beyond a few such bleats of outrage, however, the huge payout was met, by and large, with a collective sigh of resignation. Because beneath America's populist veneer, on a more subtle strata of the national psyche, there remains a strong temptation to not really give a shit. The rich, after all, have always made way too much money; what's the difference if some fat cat in New York pockets $20 million instead of $10 million?

 

The only reason such apathy exists, however, is because there's still a widespread misunderstanding of how exactly Wall Street "earns" its money, with emphasis on the quotation marks around "earns." The question everyone should be asking, as one bailout recipient after another posts massive profits — Goldman reported $13.4 billion in profits last year, after paying out that $16.2 billion in bonuses and compensation — is this: In an economy as horrible as ours, with every factory town between New York and Los Angeles looking like those hollowed-out ghost ships we see on History Channel documentaries like Shipwrecks of the Great Lakes, where in the hell did Wall Street's eye-popping profits come from, exactly? Did Goldman go from bailout city to $13.4 billion in the black because, as Blankfein suggests, its "performance" was just that awesome? A year and a half after they were minutes away from bankruptcy, how are these assholes not only back on their feet again, but hauling in bonuses at the same rate they were during the bubble?

 

The answer to that question is basically twofold: They raped the taxpayer, and they raped their clients.

 

 

 

The bottom line is that banks like Goldman have learned absolutely nothing from the global economic meltdown. In fact, they're back conniving and playing speculative long shots in force — only this time with the full financial support of the U.S. government. In the process, they're rapidly re-creating the conditions for another crash, with the same actors once again playing the same crazy games of financial chicken with the same toxic assets as before.

 

That's why this bonus business isn't merely a matter of getting upset about whether or not Lloyd Blankfein buys himself one tropical island or two on his next birthday. The reality is that the post-bailout era in which Goldman thrived has turned out to be a chaotic frenzy of high-stakes con-artistry, with taxpayers and clients bilked out of billions using a dizzying array of old-school hustles that, but for their ponderous complexity, would have fit well in slick grifter movies like The Sting and Matchstick Men. There's even a term in con-man lingo for what some of the banks are doing right now, with all their cosmetic gestures of scaling back bonuses and giving to charities. In the grifter world, calming down a mark so he doesn't call the cops is known as the "Cool Off."

 

To appreciate how all of these (sometimes brilliant) schemes work is to understand the difference between earning money and taking scores, and to realize that the profits these banks are posting don't so much represent national growth and recovery, but something closer to the losses one would report after a theft or a car crash. Many Americans instinctively understand this to be true — but, much like when your wife does it with your 300-pound plumber in the kids' playroom, knowing it and actually watching the whole scene from start to finish are two very different things. In that spirit, a brief history of the best 18 months of grifting this country has ever seen:

 

CON #1 THE SWOOP AND SQUAT

 

By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of AIG's "counterparties" — the big banks like Goldman to whom the insurance giant owed billions when it went belly up.

 

What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government.

 

This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.

 

AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities — often toxic crap of the no-money-down, no-identification-needed variety of home loan — to various institutional suckers like pensions and insurance companies, who frequently thought they were buying investment-grade instruments. At the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities — a practice that one government investigator compared to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."

 

Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't required to actually have the capital to pay off the deals. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat.

 

Thus, when the housing bubble went crazy, Goldman made money coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped.

 

Still, the trick for Goldman was: how to collect the insurance money. As AIG headed into a tailspin that fateful summer of 2008, it looked like the beleaguered firm wasn't going to have the money to pay off the bogus insurance. So Goldman and other banks began demanding that AIG provide them with cash collateral. In the 15 months leading up to the collapse of AIG, Goldman received $5.9 billion in collateral. Société Générale, a bank holding lots of mortgage-backed crap originally underwritten by Goldman, received $5.5 billion. These collateral demands squeezing AIG from two sides were the "Swoop and Squat" that ultimately crashed the firm. "It put the company into a liquidity crisis," says Eric Dinallo, who was intimately involved in the AIG bailout as head of the New York State Insurance Department.

 

 

It was a brilliant move. When a company like AIG is about to die, it isn't supposed to hand over big hunks of assets to a single creditor like Goldman; it's supposed to equitably distribute whatever assets it has left among all its creditors. Had AIG gone bankrupt, Goldman would have likely lost much of the $5.9 billion that it pocketed as collateral. "Any bankruptcy court that saw those collateral payments would have declined that transaction as a fraudulent conveyance," says Barry Ritholtz, the author of Bailout Nation. Instead, Goldman and the other counterparties got their money out in advance — putting a torch to what was left of AIG. Fans of the movie Goodfellas will recall Henry Hill and Tommy DeVito taking the same approach to the Bamboo Lounge nightclub they'd been gouging. Roll the Ray Liotta narration: "Finally, when there's nothing left, when you can't borrow another buck . . . you bust the joint out. You light a match."

 

And why not? After all, according to the terms of the bailout deal struck when AIG was taken over by the state in September 2008, Goldman was paid 100 cents on the dollar on an additional $12.9 billion it was owed by AIG — again, money it almost certainly would not have seen a fraction of had AIG proceeded to a normal bankruptcy. Along with the collateral it pocketed, that's $19 billion in pure cash that Goldman would not have "earned" without massive state intervention. How's that $13.4 billion in 2009 profits looking now? And that doesn't even include the direct bailouts of Goldman Sachs and other big banks, which began in earnest after the collapse of AIG.".... more to come...


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In part 2 of a critical (envious?) article, several steps in the USA big banks' world are outlined as further heinous cons. The original was written by Matt Taibbi on Rollingstone.com, and I will post more of the article in future posts

 

Cheers

Stuart

 

 

Part 1 was at 

 http://www.tickertalk.co.za/blog.php?user=stuart&blogentry_id=1795

 

Part 2..... 

 

" CON #2 THE DOLLAR STORE

 

In the usual "DollarStore" or "Big Store" scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it.

 

The two key elements to the Dollar Store scam are the whiz-bang theatrical redecorating job and the fact that everyone is in on it except the mark. In this case, a pair of investment banks were dressed up to look like commercial banks overnight, and it was the taxpayer who walked in and lost his shirt, confused by the appearance of what looked like real Federal Reserve officials minding the store.

 

Less than a week after the AIG bailout, Goldman and another investment bank, Morgan Stanley, applied for, and received, federal permission to become bank holding companies — a move that would make them eligible for much greater federal support. The stock prices of both firms were cratering, and there was talk that either or both might go the way of Lehman Brothers, another once-mighty investment bank that just a week earlier had disappeared from the face of the earth under the weight of its toxic assets. By law, a five-day waiting period was required for such a conversion — but the two banks got them overnight, with final approval actually coming only five days after the AIG bailout.

 

Why did they need those federal bank charters? This question is the key to understanding the entire bailout era — because this Dollar Store scam was the big one. Institutions that were, in reality, high-risk gambling houses were allowed to masquerade as conservative commercial banks. As a result of this new designation, they were given access to a virtually endless tap of "free money" by unsuspecting taxpayers. The $10 billion that Goldman received under the better-known TARP bailout was chump change in comparison to the smorgasbord of direct and indirect aid it qualified for as a commercial bank.

 

When Goldman Sachs and Morgan Stanley got their federal bank charters, they joined Bank of America, Citigroup, J.P. Morgan Chase and the other banking titans who could go to the Fed and borrow massive amounts of money at interest rates that, thanks to the aggressive rate-cutting policies of Fed chief Ben Bernanke during the crisis, soon sank to zero percent. The ability to go to the Fed and borrow big at next to no interest was what saved Goldman, Morgan Stanley and other banks from death in the fall of 2008. "They had no other way to raise capital at that moment, meaning they were on the brink of insolvency," says Nomi Prins, a former managing director at Goldman Sachs. "The Fed was the only shot."

 

 

 

In fact, the Fed became not just a source of emergency borrowing that enabled Goldman and Morgan Stanley to stave off disaster — it became a source of long-term guaranteed income. Borrowing at zero percent interest, banks like Goldman now had virtually infinite ways to make money. In one of the most common maneuvers, they simply took the money they borrowed from the government at zero percent and lent it back to the government by buying Treasury bills that paid interest of three or four percent. It was basically a license to print money — no different than attaching an ATM to the side of the Federal Reserve.

 

"You're borrowing at zero, putting it out there at two or three percent, with hundreds of billions of dollars — man, you can make a lot of money that way," says the manager of one prominent hedge fund. "It's free money." Which goes a long way to explaining Goldman's enormous profits last year. But all that free money was amplified by another scam:

 

CON #3 THE PIG IN THE POKE

 

At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaican Switch." Someone sells you what looks like an eightball of coke in a baggie, you get home and, you dumbass, it's baby powder.

 

The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."

 

The "Pig in the Poke" scam is another key to the entire bailout era. After the crash of the housing bubble — the largest asset bubble in history — the economy was suddenly flooded with securities backed by failing or near-failing home loans. In the cleanup phase after that bubble burst, the whole game was to get taxpayers, clients and shareholders to buy these worthless cats, but at pig prices.

 

One of the first times we saw the scam appear was in September 2008, right around the time that AIG was imploding. That was when the Fed changed some of its collateral rules, meaning banks that could once borrow only against sound collateral, like Treasury bills or AAA-rated corporate bonds, could now borrow against pretty much anything — including some of the mortgage-backed sewage that got us into this mess in the first place. In other words, banks that once had to show a real pig to borrow from the Fed could now show up with a cat and get pig money. "All of a sudden, banks were allowed to post absolute shit to the Fed's balance sheet," says the manager of the prominent hedge fund.

 

The Fed spelled it out on September 14th, 2008, when it changed the collateral rules for one of its first bailout facilities — the Primary Dealer Credit Facility, or PDCF. The Fed's own write-up described the changes: "With the Fed's action, all the kinds of collateral then in use . . . including non-investment-grade securities and equities . . . became eligible for pledge in the PDCF."

 

Translation: We now accept cats.

 

The Pig in the Poke also came into play in April of last year, when Congress pushed a little-known agency called the Financial Accounting Standards Board, or FASB, to change the so-called "mark-to-market" accounting rules. Until this rule change, banks had to assign a real-market price to all of their assets. If they had a balance sheet full of securities they had bought at $3 that were now only worth $1, they had to figure their year-end accounting using that $1 value. In other words, if you were the dope who bought a cat instead of a pig, you couldn't invite your shareholders to a slate of pork dinners come year-end accounting time.

 

But last April, FASB changed all that. From now on, it announced, banks could avoid reporting losses on some of their crappy cat investments simply by declaring that they would "more likely than not" hold on to them until they recovered their pig value. In short, the banks didn't even have to actually hold on to the toxic shit they owned — they just had to sort of promise to hold on to it.

 

That's why the "profit" numbers of a lot of these banks are really a joke. In many cases, we have absolutely no idea how many cats are in their proverbial bag. What they call "profits" might really be profits, only minus undeclared millions or billions in losses.

 

"They're hiding all this stuff from their shareholders," says Ritholtz, who was disgusted that the banks lobbied for the rule changes. "Now, suddenly banks that were happy to mark to market on the way up don't have to mark to market on the way down." "

 

More to come...


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Posted: 5 April 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

 

In some characteristically tough prose, several steps in the USA big banks' world are outlined as heinous cons. The original was written was written by Matt Taibbi on Rollingstone.com, and I will post more of the article in future posts.

 

Parts 1 and 2 described Con 1 as  the "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government, Con 2 as the "DollarStore" or "Big Store" scam — popularized in movies like The Sting — a huge cast of con artists is hired to create a whole fake environment into which the unsuspecting mark walks and gets robbed over and over again. A warehouse is converted into a makeshift casino or off-track betting parlor, the fool walks in with money, leaves without it; and Con 3 as the Pig in the Poke. At one point or another, pretty much everyone who takes drugs has been burned by this one, also known as the "Rocks in the Box" scam or, in its more elaborate variations, the "Jamaican Switch." Someone sells you what looks like an eightball of coke in a baggie, you get home and it's baby powder. The scam's name comes from the Middle Ages, when some fool would be sold a bound and gagged pig that he would see being put into a bag; he'd miss the switch, then get home and find a tied-up cat in there instead. Hence the expression "Don't let the cat out of the bag."

 

 

 

Here now is Part 3, which describes Cons 4 and 5...

 

Cheers

Stuart

 

 

 

" CON #4 THE RUMANIAN BOX

 

One of the great innovations of Victor Lustig, the legendary Depression-era con man who wrote the famous "Ten Commandments for Con Men," was a thing called the "Rumanian Box." This was a little machine that a mark would put a blank piece of paper into, only to see real currency come out the other side. The brilliant Lustig sold this Rumanian Box over and over again for vast sums — but he's been outdone by the modern barons of Wall Street, who managed to get themselves a real Rumanian Box.

 

How they accomplished this is a story that by itself highlights the challenge of placing this era in any kind of historical context of known financial crime. What the banks did was something that was never — and never could have been — thought of before. They took so much money from the government, and then did so little with it, that the state was forced to start printing new cash to throw at them. Even the great Lustig in his wildest, horniest dreams could never have dreamed up this one.

 

 

 

The setup: By early 2009, the banks had already replenished themselves with billions if not trillions in bailout money. It wasn't just the $700 billion in TARP cash, the free money provided by the Fed, and the untold losses obscured by accounting tricks. Another new rule allowed banks to collect interest on the cash they were required by law to keep in reserve accounts at the Fed — meaning the state was now compensating the banks simply for guaranteeing their own solvency. And a new federal operation called the Temporary Liquidity Guarantee Program let insolvent and near-insolvent banks dispense with their deservedly ruined credit profiles and borrow on a clean slate, with FDIC backing. Goldman borrowed $29 billion on the government's good name, J.P. Morgan Chase $38 billion, and Bank of America $44 billion. "TLGP," says Prins, the former Goldman manager, "was a big one."

 

Collectively, all this largesse was worth trillions. The idea behind the flood of money, from the government's standpoint, was to spark a national recovery: We refill the banks' balance sheets, and they, in turn, start to lend money again, recharging the economy and producing jobs. "The banks were fast approaching insolvency," says Rep. Paul Kanjorski, a vocal critic of Wall Street who nevertheless defends the initial decision to bail out the banks. "It was vitally important that we recapitalize these institutions."

 

But here's the thing. Despite all these trillions in government rescues, despite the Fed slashing interest rates down to nothing and showering the banks with mountains of guarantees, Goldman and its friends had still not jump-started lending again by the first quarter of 2009. That's where those nuclear-powered balls of Lloyd Blankfein came into play, as Goldman and other banks basically threatened to pick up their bailout billions and go home if the government didn't fork over more cash — a lot more. "Even if the Fed could make interest rates negative, that wouldn't necessarily help," warned Goldman's chief domestic economist, Jan Hatzius. "We're in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more."

 

Translation: You can lower interest rates all you want, but we're still not fucking lending the bailout money to anyone in this economy. Until the government agreed to hand over even more goodies, the banks opted to join the rest of the "private sector" and "save" the taxpayer aid they had received — in the form of bonuses and compensation.

 

The ploy worked. In March of last year, the Fed sharply expanded a radical new program called quantitative easing, which effectively operated as a real-live Rumanian Box. The government put stacks of paper in one side, and out came $1.2 trillion "real" dollars.

 

The government used some of that freshly printed money to prop itself up by purchasing Treasury bonds — a desperation move, since Washington's demand for cash was so great post-Clusterfuck '08 that even the Chinese couldn't buy U.S. debt fast enough to keep America afloat. But the Fed used most of the new cash to buy mortgage-backed securities in an effort to spur home lending — instantly creating a massive market for major banks.

 

And what did the banks do with the proceeds? Among other things, they bought Treasury bonds, essentially lending the money back to the government, at interest. The money that came out of the magic Rumanian Box went from the government back to the government, with Wall Street stepping into the circle just long enough to get paid. And once quantitative easing ends, as it is scheduled to do in March, the flow of money for home loans will once again grind to a halt. The Mortgage Bankers Association expects the number of new residential mortgages to plunge by 40 percent this year.

 

CON #5 THE BIG MITT

 

All of that Rumanian box paper was made even more valuable by running it through the next stage of the grift. Michael Masters, one of the country's leading experts on commodities trading, compares this part of the scam to the poker game in the Bill Murray comedy Stripes. "It's like that scene where John Candy leans over to the guy who's new at poker and says, 'Let me see your cards,' then starts giving him advice," Masters says. "He looks at the hand, and the guy has bad cards, and he's like, 'Bluff me, come on! If it were me, I'd bet everything!' That's what it's like. It's like they're looking at your cards as they give you advice."

 

In more ways than one can count, the economy in the bailout era turned into a "Big Mitt," the con man's name for a rigged poker game. Everybody was indeed looking at everyone else's cards, in many cases with state sanction. Only taxpayers and clients were left out of the loop.

 

At the same time the Fed and the Treasury were making massive, earthshaking moves like quantitative easing and TARP, they were also consulting regularly with private advisory boards that include every major player on Wall Street. The Treasury Borrowing Advisory Committee has a J.P. Morgan executive as its chairman and a Goldman executive as its vice chairman, while the board advising the Fed includes bankers from Capital One and Bank of New York Mellon. That means that, in addition to getting great gobs of free money, the banks were also getting clear signals about when they were getting that money, making it possible to position themselves to make the appropriate investments.

 

One of the best examples of the banks blatantly gambling, and winning, on government moves was the Public-Private Investment Program, or PPIP. In this bizarre scheme cooked up by goofball-geek Treasury Secretary Tim Geithner, the government loaned money to hedge funds and other private investors to buy up the absolutely most toxic horseshit on the market — the same kind of high-risk, high-yield mortgages that were most responsible for triggering the financial chain reaction in the fall of 2008. These satanic deals were the basic currency of the bubble: Jobless dope fiends bought houses with no money down, and the big banks wrapped those mortgages into securities and then sold them off to pensions and other suckers as investment-grade deals. The whole point of the PPIP was to get private investors to relieve the banks of these dangerous assets before they hurt any more innocent bystanders.

 

But what did the banks do instead, once they got wind of the PPIP? They started buying that worthless crap again, presumably to sell back to the government at inflated prices! In the third quarter of last year, Goldman, Morgan Stanley, Citigroup and Bank of America combined to add $3.36 billion of exactly this horseshit to their balance sheets.

 

This brazen decision to gouge the taxpayer startled even hardened market observers. According to Michael Schlachter of the investment firm Wilshire Associates, it was "absolutely ridiculous" that the banks that were supposed to be reducing their exposure to these volatile instruments were instead loading up on them in order to make a quick buck. "Some of them created this mess," he said, "and they are making a killing undoing it." " ... more to come...

 

 

 


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Posted: 28 April 2010 - 6 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

Amid all the Goldman-bashing, this piece from the UK Telegraph highlights some important messages for ANYONE who may ever trade with a marketmaker from time to time. That includes you!!!!

 

Cheers

Stuart

______________________________________________________

 

Goldman boss Lloyd Blankfein denies moral obligation towards clients

Lloyd Blankfein has admitted that he believes Goldman Sachs has "no moral obligation to tell clients it is betting against a product it is asking them to buy".

 

By James Quinn, US Business Editor
Published: 6:00AM BST 28 Apr 2010

 

The stark admission – made by the bank's chairman at the end of a more than nine-hour marathon hearing before the US Senate – came in spite of his assertion that "I think people trust us" as he tried to fend off accusations that Goldman inflated the US housing bubble. Senator Carl Levin told the veteran banker that he "wouldn't trust" Goldman as he repeatedly asked whether the bank would disclose its position "when they're buying something you solicit them to buy, and then you're taking a position against them?"

 

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"I don't believe there is any obligation" to tell investors, Mr Blankfein responded. "I don't think we'd have to tell them, I don't think we'd even know ourselves." His responses are key in the light of the Securities and Exchange Commission's civil fraud charges against Goldman Sachs in connection with a $1bn mortgage-backed derivative which the regulator alleges was mis-sold to investors, allowing one investor to benefit over another. The admission came during testy questioning of seven of the bank's current and former executives before the Senate permanent sub-committee on investigations.

 

Senator Levin said he was "deeply" troubled by "Goldman documents [which] show it was betting heavily against a market it was selling to clients."

Using 901 pages of internal Goldman emails and other documents, Senator Levin tried to highlight examples where the bank used clients "as objects for its own profit." He referred to a $2bn transaction – known as Hudson 1 – the aim of which he said was to "shift risk" from Goldman's balance sheet. One email showed a Goldman salesman admitting Hudson was "junk" while a senior manager later called the effort a "great job". For much of the hearing, the seven 'witnesses' attempted to use a market-maker defence, based on the assertion that Goldman's role was purely as a middle-man in the market.

 

Dan Sparks, the former head of Goldman's mortgage department, was the only one of the seven to come close to apologising for the bank's role in the financial crisis. He admitted that Goldman was "a participant in an industry that got loose" and that it "made some poor decisions in hindsight." However, despite having left the bank in 2008, Mr Sparks still employed the continually-repeated mantra used by his former colleagues – that full disclosure to clients "was not something that's a responsibility of a market maker."

 

 

Earlier in the day, Fabrice Tourre – the French-born Goldman trader also accused of fraud by the SEC – admitted to a lack of accuracy in key documentation relating to the $1bn (£655m) toxic debt ­parcel at the heart of the fraud allegations engulfing his employer. Mr Tourre confessed that a document submitted to the bank's mortgage capital committee concerning the Abacus 2007 derivative "could have been more accurate" and "was merely a 'cut and paste' from previous transactions."  The memo stated that Goldman and ACA Capital selected the mortgages within Abacus – a synthetic collateralised debt obligation (CDO) under scrutiny by the SEC – when in fact almost half were selected by Paulson & Co, the hedge fund which made a $1bn profit from shorting the transaction.

Mr Tourre denied the SEC's allegations against him, saying he had been the subject of "unfounded attacks" on his character and motives.


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Posted: 14 May 2010 - 2 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

The shift in who is the dominant force in world economics continues.

 

The last three CFA intervarsity challenges were won by Asian universities....

http://www.tickertalk.co.za/blog.php?user=pmrmar002&blogentry_id=1856

 

The new Head of Harvard Business School is Indian (Asian Indian, that is)...

http://www.indolink.com/displayArticleS.php?id=051010024913

 

And the US markets comprises less than 40% of the world's equities by market cap at last count

user_uploads/20 Stock Exchanges(1).pdf

 

Why does the CAPM still build out from US treasuries as the "risk free" rate?

 

Cheers

Stuart


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Posted: 20 May 2010 - 1 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

Many small investors know they are are up against it in terms of playing against the house, but so too are most professionals, according to Jesse Felder at SeekingALpha.com. Food for thought!

 

Cheers

Stuart

_________________________________________________________________
 
He writes:-
 
Earlier this month Bloomberg gave us this headline:
GS Has First Quarter With No Trading Loss
 
Today they give us this one:
GS Hands Clients Losses in “Top Trades”
 
Does anyone else see the irony here? Goldman doesn't have even one single losing day in the entire first quarter but it's clients, on the other hand, lose money on the firms' "top trades."
 
There is only one explanation for this and you will find it in any of the 'behind the scenes' financial books written by former insiders. The big investment houses make it a common practice to keep profitable trades for themselves while pawning the losing trades off on their customers.
 
In his classic "Liar's Poker" Michael Lewis writes about his very first trade as a bond salesman for Salomon Brothers:
 
My first order. I felt thrilled and immediately called the U.S. treasury trader in New York and sold him three million dollars' worth of treasury bonds. Then I shouted over to the London corporate bond trader, "You can do three million of the ATTs," trying, of course, to sound as if it really weren't that big a deal, just another trade, like going for a walk in the park.
 
There was in every office of Salomon a systemwide loudspeaker, called the hoot and holler or just the hoot. Apart from money, success at Salomon meant having your name shouted over the hoot. The AT&T trader's voice came loudly over the hoot: "Mike Lewis has just sold three million of our AT and Ts for us, a great trade for the desk, thank you very much, Mike."
 
I was flushed with pride. Flushed with pride, you understand. But something didn't quite fit. What did he mean, "Our AT and Ts"? I hadn't realized the AT&T bonds had been on Salomon's trading books. I had thought my trader friend had snapped them up from stupid dealers at other firms. If the bonds were ours to begin with . . .
 
Dash was staring at me, disbelieving. "You sold those bonds? Why?" he asked.
 
"Because the trader said it was a great trade," I said.
 
"Nooooooo." Dash put his head in his hands, as if in pain. I could see he was smiling. No, laughing. "What else is a trader going to say?" he said. "He's been sitting on that position for months. It's underwater. He's been dying to get rid of it. Don't tell him I told you this, but you're going to get f**ked."
 
Lewis didn't get f**ked but his customer did. Salomon's great trade was it's customer's big loser. Is this starting to sound familiar?
 
On main street this would be seen by anyone as, if not fraud, just plain bad business. On Wall Street, however, it's just business as usual.
 

 

 


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Posted: 1 June 2010 - 0 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

 

 

World Cup to divert attention in June

Commentary: With passion, drama and cheating, what's not to like?

By Nick Godt, MarketWatch

NEW YORK (MarketWatch) -- Forget baseball and its World Series -- coincidentally won by the U.S. every single year: Soccer is the number one sport in the world.

As U.S. investors return from the long Memorial Day weekend Tuesday, the global media blitz will start picking up momentum for the 2010 World Cup held in South Africa starting June 11.

 

A slew of economic indicators are on tap for next week, ranging from manufacturing data to the closely watched monthly unemployment report which is due on Friday. It might not be enough, in the U.S., to drown out attempts from the right to pin the BP oil spill disaster on the Obama administration -- after the past two decades saw an unprecedented acceleration in government deregulation, affecting everything from environmental to financial oversight. But after a frightful 14% correction in U.S. stocks in May, and the month of June being traditionally quiet, it might be just enough to divert investors' attention from the crisis in Europe.

 

"People get infused by the World Cup, which draws in huge TV audiences," says James Thorneley, communications manager at Aberdeen Asset Managers in London. "It will definitely take people's minds off of things." From the kids in the favelas of Rio de Janeiro and the slums around Johannesburg, to traders in London, Paris, or Frankfurt, and many of the masters of the universe (whoever they are nowadays), much of the world's attention, canalized through the 24-hour news cycle (and some pirated TV-transmissions), will be there. And in the middle of the latest nuclear saber-rattling between the Koreas, it's even likely North Korea's Kim Jong-Il will be watching. Older North Koreans still remember fondly when, in a stunning upset, they took out Italy back in 1966.

Meanwhile, public anger and frustration at the financial crisis of the past three years and its devastating impact on jobs and the economy, is seeking for identifiable targets. Soccer provides the perfect outlet, that potent mix of nationalism, unbridled passion, drama and cheating. It even mimics the pretense that things are fair in this world, pitting underfunded teams from the "developing world" against overpaid capricious superstars.  This World Cup, at least, is being held in South Africa, where Nelson Mandela helped turn the Springboks, the apartheid-era rugby team, into a powerful symbol of healing unity.

 

If nothing else, various studies have shown that victories by the home team tend to boost consumer confidence -- and sometimes, consumer spending. Hard to say whether this would hold true for Greece or South Korea, which face off in one of the first games on June 12.

 

Diversion

In any case, the diversion might just coincide with calls from some smart-money advisors that stocks are due to stabilize and perhaps even rise a little over the coming month. U.S. stocks have just had their worst month since February 2009. On Friday, a downgrade of Spain's debt rating revived investors' worries about the European debt crisis. In May, the Dow Jones Industrial Average fell 7.9% and the S&P 500 index slumped 8.2%, both posting their worst performance in 15 months. The Nasdaq Composite  slumped 8.3%, its worst performance since Nov. 2008.  

 

 

 

Europe's problems aren't likely to go away anytime soon, and the impact on European and global growth remains a big uncertainty. But the acceleration of the crisis in May helped take much needed air out of a nearly uninterrupted 80% rally since March of last year. After a more than 14% correction, and with many indicators now pointing to "near-term" risk already being priced in for June, stocks did seem to stabilize over the past week. That's still not enough to convince Bruce Strout, senior investment manager at Aberdeen, to include the U.S. in his World Cup investment dream team. He's actually more optimist about the U.S. soccer team, which faces England on June 12.

 

But U.S. stocks still look "very expensive" to him, given "poor" economic fundamentals.

Among Strout's preferred picks for long-term investment opportunities are stocks in Latin America, especially Brazil, Argentina, and Mexico, where soccer is -- incidentally -- close to a religion. Brazilian energy company Petrobras makes his list.

 

Over at BNY Convergex, meanwhile, analysts think that the huge demand placed on South Africa's poor energy infrastructure during the World Cup might lead to the shutdowns of some mines, which could give a boost to platinum or gold prices. If mine shutdowns take place, platinum could be the bigger winner. Gold has already gained 3% in May and after a 6% advance in April. Platinum, meanwhile, has slumped nearly 17% in May. Read more on gold and platinum.

Nick Godt is MarketWatch's markets editor, based in New York. Original at  http://www.marketwatch.com/story/world-cup-perfect-diversion-for-markets-in-june-2010-05-30?link=kiosk

 

 


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Posted: 2 June 2010 - 2 comment(s) [ Comment ] - 0 trackback(s) [ Trackback ]
Category: Market news

Many many marketers are trying to gauge the potential and value of social networking. Facebook claims around 450 million users worldwide, of which around 2m in South Africa. Interestingly, that SA share of world users  (a half percent) fits well with South Africa's share by other economic measures.

 

Take a look at the shape of the SA social networkers' user base - and think about which way it is moving.

 

Cheers

Stuart

 

 

alt


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