Wednesday, May 6, 2009

Heyidiot.com

I think the biggest result of the “Stress Test” process has been the redefinition on how bank solvency is defined. We have moved from solvency being excess “Capital” to solvency being defined as excess “Equity”.

The key is that Capital can only be generated by adding new cash and Equity can be derived by converting Preferred Stock into Common Stock. Therefore, the Stress Test proved itself to be a bunch of accounting bulls**t. Did you expect anything less?

Moreover, the way the test was conducted, with banks lobbying regulators to get a better grade and each round of testing leaked to CNBC, WSJ and Bloomberg has made a mockery of Securities Laws and the tradition of an independent oversight system. Wall Street rules Washington and its politicians.

Dot Com Dow
This all reminds me of when I lived in The Silicon Valley in the late 1990’s. A buddy of mine ran a start up and he told me a story about taking his company public. He had a CFO who was used to doing things the right way – he wanted to take the company public after the company showed Earnings.

But the Market couldn’t have cared less about Earnings (profitability). There was simply a feeding frenzy, where IPOs were valued based on whether or not they were going up. In the end, they had the wrong CFO, because the rules had changed and the CFO hadn’t changed with them. Also in the end, worthless companies became worthless stocks and shareholders were left with massive losses.

Crony Socialism
I’m telling you right now – the old rules no longer apply. It is the Wild West of Socialism (Fascism?), where the Government, the Media, Corporate Leaders and Regulators are all in bed together. Some are trying to save the World (the end justifies the means) and others are just trying to get rich.

HeyIdiot.Com
Larry Ellison and his buddies issued a fake IPO in 1999 called HeyIdiot.Com. He issued certificates and made fun of the fact that his bogus company had zero revenue, zero earnings and therefore should trade at $100 per share. Its only business was to sell its own shares – a “cash portal” (lol)…

Today’s market has become another Tech Bubble, where banks can create their own earnings with the blessing of the Government. Asset Price Appreciation is Obama’s (and Bushs’ and Clinton’s) greatest policy weapon and he will milk it for all he can.

Deja Vous All Over AgainThe point I am trying to get to is that we have seen this before where people blind themselves to economic reality, but look to buy high and sell to a greater fool at a higher price. That is how you got rich since 1994. I am afraid that we are once again into one of those cheap credit, speculation driven environments where fundamentals don’t matter – just buy what is going up, because it is going up (isn’t that what Cramer tells you to do)…

We were goofing on the idiocy of the Tech Bubble in early 1999, but you had to play to keep up with the Jones. We laughed at the part-time hairdresser who bought the million dollar house with 100% financing. Investors weren’t laughing in 2000 in San Jose or 2007 in Irvine. I know – I was there!

We will soon be goofing on the idiocy of Banks that make loans, yet have no Capital and how somebody is dumb enough to buy a 30-year US Treasury with a 5% Yield, when we all know that the Government CPI is 2%, but the real CPI is more like 10 or 12%. We will look in awe as some Commodity-based Stock Market rallies 600% in a few years, even though we know that the Fundamentals make the move impossible to sustain.

It has happened before and Obama is banking on the fact that he can invent enough Dollars to make it happen again. The same skill set that helped me avoid the disaster that was 2008 will also allow me to protect money when this US Treasury Bubble pops. My fear is that there is nobody big enough to bail out the Fed when it goes insolvent, sometime during Obama’s second term. This is the last Bubble.

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